UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549
                                    FORM 10-K

(Mark One)

[x]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
                                  ACT OF 1934

                   For the fiscal year ended December 31, 1998

                                       OR

    [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                        For the transition period from to


                         Commission file number 0-19140

                            CNL INCOME FUND VII, LTD.
             (Exact name of registrant as specified in its charter)

                   Florida                            59-2963871
       (State or other jurisdiction of   (I.R.S. Employer Identification No.)
       incorporation or organization)

                        400 East South Street, Suite 500
                             Orlando, Florida 32801
          (Address of principal executive offices, including zip code)

       Registrant's telephone number, including area code: (407) 650-1000

               Securities registered pursuant to Section 12(b) of
                                    the Act:

                 Title of each class:      Name of exchange on which registered:
                         None                         Not Applicable

               Securities registered pursuant to Section 12(g) of
                                    the Act:

               Units of limited partnership interest ($1 per Unit)
                                (Title of class)

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934 during the preceding 12 months (or such shorter  period that the registrant
was  required  to file such  reports),  and (2) has been  subject to such filing
requirements for the past 90 days: Yes X No

         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item 405 of Regulation S-K is not contained  herein,  and will not be contained,
to the best of  registrant's  knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. [x]

         Aggregate market value of the voting stock held by nonaffiliates of the
registrant: The registrant registered an offering of 30,000,000 units of limited
partnership  interest  (the  "Units") on Form S-11 under the  Securities  Act of
1933, as amended. Since no established market for such Units exists, there is no
market value for such Units. Each Unit was originally sold at $1 per Unit.

                      DOCUMENTS INCORPORATED BY REFERENCE:
                                      None


<PAGE>



                                          
                                     PART I


Item 1.  Business

         CNL Income Fund VII, Ltd. (the "Registrant" or the  "Partnership") is a
limited  partnership  which was  organized  pursuant to the laws of the State of
Florida on August 18, 1989. The general  partners of the  Partnership are Robert
A.  Bourne,  James  M.  Seneff,  Jr.  and  CNL  Realty  Corporation,  a  Florida
corporation  (the  "General  Partners").  Beginning  on January  30,  1990,  the
Partnership offered for sale up to $30,000,000 of limited partnership  interests
(the "Units")  (30,000,000 Units each at $1 per Unit) pursuant to a registration
statement  on Form S-11  under  the  Securities  Act of 1933,  as  amended.  The
offering  terminated  on August 1, 1990,  as of which date the maximum  offering
proceeds of  $30,000,000  had been received from  investors who were admitted to
the Partnership as limited partners (the "Limited Partners").

         The  Partnership  was organized to acquire both newly  constructed  and
existing  restaurant  properties,  as well as properties upon which  restaurants
were to be  constructed  (the  "Properties"),  which  are  leased  primarily  to
operators of national and regional fast-food and family-style  restaurant chains
(the "Restaurant Chains").  Net proceeds to the Partnership from its offering of
Units,  after  deduction  of  organizational  and  offering  expenses,  totalled
$26,550,000, and were used to acquire 42 Properties, including interests in nine
Properties  owned by joint  ventures in which the  Partnership is a co-venturer,
and to establish a working  capital  reserve for  Partnership  purposes.  During
1994, the Partnership sold its Property in St. Paul,  Minnesota,  and reinvested
the majority of the net sales proceeds in a Checkers Property in Winter Springs,
Florida,  consisting  of only  land,  and a Jack in the Box  Property  in  Yuma,
Arizona,  which is owned as  tenants-in-common  with an affiliate of the General
Partners.  The lessee of the Property  consisting of only land owns the building
currently on the land.  During 1995,  the  Partnership  sold its  Properties  in
Florence,  South Carolina,  and Jacksonville,  Florida,  and accepted promissory
notes  in the  principal  sum  of  $1,160,000  and  $240,000,  respectively.  In
addition,  the building located on the Partnership's  Property in Daytona Beach,
Florida, was demolished in accordance with a condemnation agreement during 1995.
During the year ended December 31, 1996, the Partnership  sold its Properties in
Hartland, Michigan, and Colorado Springs, Colorado, and reinvested the net sales
received from the sale of the Colorado  Springs,  Colorado  Property in a Boston
Market Property in Marietta,  Georgia.  During the year ended December 31, 1997,
the  Partnership  used the net sales  proceeds  from the sale of the Property in
Hartland,  Michigan,  to invest in CNL Mansfield Joint Venture with an affiliate
of the  General  Partners  in  exchange  for a 79 percent  interest in the joint
venture.  In addition,  during 1997,  the  Partnership  sold its  Properties  in
Columbus,  Indiana  and  Dunnellon,  Florida,  and  sold the  Property  in Yuma,
Arizona,  which was owned as tenants-in-common  with an affiliate of the General
Partners,  and  reinvested  the net sales  proceeds in a Property in Smithfield,
North Carolina,  and a Property in Miami,  Florida,  each as  tenants-in-common,
with affiliates of the General Partners.  As a result of the above transactions,
as of December 31, 1998, the Partnership currently owns 40 Properties, including
interests in ten Properties  owned by joint ventures in which the Partnership is
a co-venturer and two Properties owned with affiliates as tenants-in-common. The
Properties are leased on a triple-net basis with the lessees responsible for all
repairs and maintenance, property taxes, insurance and utilities.

         On March 11, 1999, the  Partnership  entered into an Agreement and Plan
of Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership  would be merged with and into a subsidiary  of APF (the  "Merger").
APF is a real estate investment trust whose primary business is the ownership of
restaurant properties leased on a long-term,  "triple-net" basis to operators of
national and regional  restaurant  chains. APF has agreed to issue shares of its
common stock, par value $0.01 per share (the "APF Shares"), as consideration for
the Merger.  At a special meeting of the partners that is expected to be held in
the third  quarter  of 1999,  Limited  Partners  holding in excess of 50% of the
Partnership's  outstanding limited partnership interests must approve the Merger
prior to consummation of the transaction. If the Limited Partners at the special
meeting approve the Merger,  APF will own the Properties and other assets of the
Partnership. See Item 8.
Financial Statements and Supplementary Data -- Note 11. Subsequent Event.

         In the event that the Limited  Partners  vote  against the Merger,  the
Partnership will hold its Properties  until the General Partners  determine that
the sale or other  disposition of the Properties is  advantageous in view of the
Partnership's investment objectives. In deciding whether to sell Properties, the
General Partners will consider factors such as potential  capital  appreciation,
net cash flow and federal income tax considerations. Certain lessees also have


<PAGE>


been granted  options to purchase  Properties,  generally at the Property's then
fair market value after a specified  portion of the lease term has elapsed.  The
Partnership  has no  obligation  to sell all or any portion of a Property at any
particular  time,  except as may be required  under  property  purchase  options
granted to certain lessees.

Leases

         Although there are variations in the specific terms of the leases,  the
following  is  a  summarized   description  of  the  general  structure  of  the
Partnership's  leases. The leases of the Properties owned by the Partnership and
the joint ventures in which the Partnership is a co-venturer provide for initial
terms  ranging  from five to 20 years (the average  being 17 years),  and expire
between 2003 and 2016. Generally, the leases are on a triple-net basis, with the
lessee  responsible for all repairs and maintenance,  property taxes,  insurance
and  utilities.  The leases of the  Properties  provide for minimum  base annual
rental payments  (payable in monthly  installments)  ranging from  approximately
$22,100 to $191,900.  The majority of the leases  provide for  percentage  rent,
based on sales in excess of a specified amount. In addition,  some of the leases
provide that,  commencing in specified lease years  (generally  ranging from the
sixth to the eleventh lease year), the annual base rent required under the terms
of the lease will increase.

         Generally,  the  leases  of the  Properties  provide  for  two to  four
five-year  renewal  options  subject  to the same  terms and  conditions  as the
initial  lease.  Certain  lessees  also have been  granted  options to  purchase
Properties at the Property's then fair market value after a specified portion of
the lease  term has  elapsed.  Under the terms of  certain  leases,  the  option
purchase  price  may equal  the  Partnership's  original  cost to  purchase  the
Property (including  acquisition  costs),  plus a specified  percentage from the
date of the lease or a specified percentage of the Partnership's purchase price,
if that amount is greater than the Property's  fair market value at the time the
purchase option is exercised.

         The leases also  generally  provide that, in the event the  Partnership
wishes to sell the Property  subject to that lease,  the Partnership  first must
offer the  lessee  the right to  purchase  that  Property  on the same terms and
conditions,  and for the same  price,  as any offer  which the  Partnership  has
received for the sale of the Property.

Major Tenants

         During 1998,  three  lessees of the  Partnership  and its  consolidated
joint venture, Golden Corral Corporation,  Restaurant Management Services, Inc.,
and  Waving  Leaves,  Inc.,  each  contributed  more  than  ten  percent  of the
Partnership's   total  rental   income   (including   rental   income  from  the
Partnership's  consolidated joint venture and the Partnership's  share of rental
income from nine  Properties  owned by  unconsolidated  joint  ventures  and two
Properties owned with affiliates as tenants-in-common). As of December 31, 1998,
Golden  Corral  Corporation  was  the  lessee  under  leases  relating  to  five
restaurants,  Restaurant  Management Services,  Inc. was the lessee under leases
relating to seven  restaurants  and one site currently  consisting of land only,
and  Waving  Leaves,   Inc.  was  the  lessee  under  leases  relating  to  four
restaurants.  It is  anticipated  that,  based on the  minimum  rental  payments
required by the leases,  these three  lessees each will  continue to  contribute
more than ten  percent of the  Partnership's  total  rental  income in 1999.  In
addition,  three Restaurant Chains, Golden Corral Family Steakhouse  Restaurants
("Golden Corral"),  Hardee's,  and Burger King, each accounted for more than ten
percent of the  Partnership's  total  rental  income in 1998  (including  rental
income from the Partnership's  consolidated  joint venture and the Partnership's
share of  rental  income  from nine  Properties  owned by  unconsolidated  joint
ventures and two  Properties  owned with  affiliates as  tenants-in-common).  In
1999, it is anticipated that these three Restaurant Chains each will continue to
account for more than ten percent of the  Partnership's  total rental  income to
which the Partnership is entitled under the terms of the leases.  Any failure of
these lessees or Restaurant  Chains could  materially  affect the  Partnership's
income if the  Partnership  is not able to re-lease the  Properties  in a timely
manner.  As of December 31, 1998,  Golden Corral  Corporation  leased Properties
with an  aggregate  carrying  value,  excluding  acquisition  fees  and  certain
acquisition  expenses,  in  excess  of 20  percent  of the  total  assets of the
Partnership.

Joint Venture Arrangements

         The  Partnership  has entered  into a joint  venture  arrangement,  San
Antonio #849 Joint Venture, with an unaffiliated entity to purchase and hold one
Property. In addition, as of December 31, 1996, the Partnership had entered into
four separate joint venture  arrangements,  Halls Joint Venture,  CNL Restaurant
Investments  II, Des Moines Real Estate Joint Venture,  and CNL Mansfield  Joint
Venture,  with  affiliates  of the General  Partners  to purchase  and hold nine
Properties through such joint ventures.  The joint venture  arrangements provide
for the  Partnership  and its joint  venture  partners to share in all costs and
benefits  associated with the joint venture in accordance with their  respective
percentage interests in the joint venture. The Partnership and its joint venture
partners are also jointly and severally  liable for all debts,  obligations  and
other liabilities of the joint venture.

         San Antonio #849 Joint Venture,  Halls Joint  Venture,  Des Moines Real
Estate Joint Venture,  and CNL Mansfield Joint Venture each have an initial term
of 20 years and, after the expiration of the initial term, continue in existence
from year to year unless terminated at the option of any joint venturer or by an
event of dissolution.  Events of dissolution include the bankruptcy,  insolvency
or  termination of any joint  venturer,  sale of the Property owned by the joint
venture and mutual  agreement of the  Partnership and each joint venture partner
to dissolve the joint  venture.  CNL Restaurant  Investments  II's joint venture
agreement  does not provide a fixed  term,  but  continues  in  existence  until
terminated by any of the joint venturers.

         The  Partnership  has management  control of the San Antonio #849 Joint
Venture and shares  management  control  equally with  affiliates of the General
Partners for Halls Joint Venture, CNL Restaurant Investments II, Des Moines Real
Estate  Joint  Venture,  and CNL  Mansfield  Joint  Venture.  The joint  venture
agreements  restrict  each  venturer's  ability to sell,  transfer or assign its
joint venture  interest  without first offering it for sale to its joint venture
partner,  either upon such terms and  conditions  as to which the  venturers may
agree or,  in the  event  the  venturers  cannot  agree,  on the same  terms and
conditions  as any offer  from a third  party to  purchase  such  joint  venture
interest.

         Net cash flow from operations of San Antonio #849 Joint Venture,  Halls
Joint  Venture,  CNL  Restaurant  Investments  II, Des Moines Real Estate  Joint
Venture,  and CNL  Mansfield  Joint  Venture is  distributed  83.3%,  51.1%,  18
percent, 4.79% and 79 percent,  respectively, to the Partnership and the balance
is  distributed to each of the other joint venture  partners in accordance  with
their  respective  percentage  interests in the joint venture.  Any  liquidation
proceeds,  after paying joint venture debts and liabilities and funding reserves
for  contingent  liabilities,  will be  distributed  first to the joint  venture
partners with positive  capital account  balances in proportion to such balances
until such  balances  equal zero,  and  thereafter  in  proportion to each joint
venture partner's percentage interest in the joint venture.

         In addition to the above joint venture  agreements,  in July 1994,  the
Partnership  entered  into an  agreement  to hold a Jack in the Box  Property as
tenants-in-common  with an  affiliate  of the General  Partners.  The  agreement
provided  for the  Partnership  and the  affiliate  to share in the  profits and
losses of the  Property in  proportion  to each  co-venturer's  percentage.  The
Partnership  owned a 48.33%  interest in this  Property.  In October  1997,  the
Partnership and the affiliate,  as  tenants-in-common,  sold the Jack in the Box
Property in Yuma,  Arizona.  In December 1997, the  Partnership  entered into an
agreement  to hold a  Property  in Miami,  Florida,  as  tenants-in-common  with
affiliates of the General Partners and in conjunction therewith,  reinvested its
portion of the net sales  proceeds  received  from the sale of the  Property  in
Yuma,  Arizona,  along with  additional  funds from the sale of the  Property in
Columbus,  Indiana. The agreement provides for the Partnership and the affiliate
to share in the  profits  and  losses  of the  Property  in  proportion  to each
co-venturer's percentage interest. The Partnership owns a 35.64% interest in the
Property in Miami, Florida.

         In  addition,  in  December  1997,  the  Partnership  entered  into  an
agreement to hold a Golden Corral  Property in Smithfield,  North  Carolina,  as
tenants-in-common  with an  affiliate  of the General  Partners.  The  agreement
provides  for the  Partnership  and the  affiliate  to share in the  profits and
losses of the Property in proportion to each co-venturer's  percentage interest.
The Partnership owns a 53 percent interest in this Property.

Certain Management Services

         CNL Fund Advisors, Inc., an affiliate of the General Partners, provides
certain  services  relating to management of the  Partnership and its Properties
pursuant to a management  agreement with the Partnership.  Under this agreement,
CNL  Fund  Advisors,   Inc.  is  responsible  for  collecting  rental  payments,
inspecting  the  Properties  and the tenants'  books and records,  assisting the
Partnership  in  responding  to  tenant  inquiries  and  notices  and  providing
information  to  the  Partnership  about  the  status  of  the  leases  and  the
Properties.  CNL Fund  Advisors,  Inc.  also  assists  the  General  Partners in
negotiating the leases.  For these  services,  the Partnership has agreed to pay
CNL Fund Advisors,  Inc. an annual fee of one percent of the sum of gross rental
revenues from Properties  wholly owned by the Partnership plus the Partnership's
allocable  share of gross revenues of joint ventures in which the Partnership is
a co-venturer and the Property held as tenants-in-common with an affiliate,  but
not in excess of competitive fees for comparable services.  Under the management
agreement, the management fee is subordinated to receipt by the Limited Partners
of an aggregate, ten percent,  cumulative,  noncompounded annual return on their
adjusted  capital  contributions  (the "10%  Preferred  Return"),  calculated in
accordance   with  the   Partnership's   limited   partnership   agreement  (the
"Partnership  Agreement").  In any year in which the Limited  Partners  have not
received the 10% Preferred Return, no property management fee will be paid.

         The management agreement continues until the Partnership no longer owns
an interest in any Properties unless terminated at an earlier date upon 60 days'
prior notice by either party.

Competition

         The fast-food and family-style  restaurant business is characterized by
intense  competition.  The restaurants on the Partnership's  Properties  compete
with  independently  owned  restaurants,  restaurants which are part of local or
regional chains, and restaurants in other well-known national chains,  including
those offering different types of food and service.

Employees

         The  Partnership   has  no  employees.   The  officers  of  CNL  Realty
Corporation  and the officers and employees of CNL Fund Advisors,  Inc.  perform
certain  services for the  Partnership.  In addition,  the General Partners have
available to them the  resources  and expertise of the officers and employees of
CNL Group, Inc., a diversified real estate company, and its affiliates,  who may
also perform certain services for the Partnership.


Item 2.  Properties

         As of December 31, 1998,  the  Partnership  owned,  either  directly or
through  joint  venture  arrangements,  40  Properties  located  in  13  states.
Reference  is made to the Schedule of Real Estate and  Accumulated  Depreciation
filed  with this  report for a listing of the  Properties  and their  respective
costs, including acquisition fees and certain acquisition expenses.

Description of Properties

         Land. The Partnership's  Property sites range from approximately 10,800
to 110,200  square  feet  depending  upon  building  size and local  demographic
factors.  Sites  purchased  by  the  Partnership  are  in  locations  zoned  for
commercial use which have been reviewed for traffic patterns and volume.

         Buildings.  Generally,  each of the Properties owned by the Partnership
includes  a  building  that is one of a  Restaurant  Chain's  approved  designs.
However,  the building located on the Checkers  Property is owned by the tenant,
while the land parcel is owned by the Partnership.

         In addition,  the  building  located on the  Partnership's  Property in
Daytona  Beach,  Florida,  was  demolished  in  accordance  with a  condemnation
agreement  during  1995.  The  buildings   generally  are  rectangular  and  are
constructed from various  combinations of stucco,  steel,  wood, brick and tile.
The sizes of the buildings owned by the Partnership range from approximately 700
to 10,600  square  feet.  All  buildings  on  Properties  are  freestanding  and
surrounded by paved  parking  areas.  Buildings  are suitable for  conversion to
various uses, although modifications may be required prior to use for other than
restaurant operations.

         Generally,  a  lessee  is  required,  under  the  terms  of  its  lease
agreement,  to make such capital  expenditures as may be reasonably necessary to
refurbish  buildings,  premises,  signs and  equipment  so as to comply with the
lessee's  obligations,  if applicable,  under the franchise agreement to reflect
the current commercial image of its Restaurant Chain. These capital expenditures
are required to be paid by the lessee during the term of the lease.

         Leases  with Major  Tenants.  The terms of each of the leases  with the
Partnership's  major  tenants as of December  31,  1998 (see Item 1.  Business -
Major  Tenants),  are  substantially  the  same as  those  described  in Item 1.
Business - Leases.



<PAGE>


         Golden Corral  Corporation leases five Golden Corral  restaurants.  The
initial term of each lease is 15 years (expiring  between 2004 and 2012) and the
average  minimum  base  annual  rent is  approximately  $148,700  (ranging  from
approximately $137,100 to $166,700).

         Restaurant  Management Services,  Inc. leases five Popeyes restaurants,
one Shoney's  restaurant,  one Church's  Fried Chicken  restaurant  and one site
currently  consisting  of land  only  (formerly  operated  as a  Church's  Fried
Chicken).  The initial  term of each lease is 19 to 20 years  (expiring  between
2009 and 2010) and the average minimum base annual rent is approximately $53,700
(ranging from approximately $22,100 to $121,000).

         Waving Leaves, Inc. leases four Hardee's restaurants.  The initial term
of each lease is 20 years (expiring in 2010) and the average minimum base annual
rent is approximately $79,200 (ranging from approximately $70,300 to $89,400).

         The General Partners consider the Properties to be well-maintained  and
sufficient for the Partnership's operations.


Item 3.  Legal Proceedings

         Neither the  Partnership,  nor its General Partners or any affiliate of
the General Partners, nor any of their respective properties,  is a party to, or
subject to, any material pending legal proceedings.


Item 4.  Submission of Matters to a Vote of Security Holders

         Not applicable.



                                     PART II


Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters

         As of March 11,  1999 there were 3,150  holders of record of the Units.
There is no public trading market for the Units,  and it is not anticipated that
a public  market for the Units will develop.  Limited  Partners who wish to sell
their  Units  may  offer  the  Units  for  sale  pursuant  to the  Partnership's
distribution  reinvestment  plan (the "Plan"),  and Limited Partners who wish to
have their  distributions  used to acquire additional Units (to the extent Units
are  available  for  purchase),  may do so  pursuant  to such Plan.  The General
Partners have the right to prohibit  transfers of Units.  From inception through
December 31, 1998, the price paid for any Unit transferred  pursuant to the Plan
was $.95 per Unit. The price paid for any Unit  transferred  other than pursuant
to the Plan was subject to negotiation by the purchaser and the selling  Limited
Partner. The Partnership will not redeem or repurchase Units.

         The following table reflects,  for each calendar quarter, the high, low
and average  sales prices for transfers of Units during 1998 and 1997 other than
pursuant to the Plan, net of commissions.
<TABLE>
<CAPTION>

                                                    1998 (1)                               1997 (1)
                                         --------------------------------      ----------------------------------
                                          High       Low        Average         High        Low         Average
                                         -------    -------    ----------      --------    -------     ----------
<S> <C>
         First Quarter                     $.95       $.91          $.93         $1.00       $.95           $.96
         Second Quarter                     .95        .87           .91           .95        .82            .91
         Third Quarter                      .95        .90           .94           .92        .79            .85
         Fourth Quarter                     .95        .78           .91           .84        .81            .83
</TABLE>

(1)      A total of  194,088  and  94,606  Units  were  transferred  other  than
         pursuant  to the Plan for the years ended  December  31, 1998 and 1997,
         respectively.

         The  capital  contribution  per Unit was $1.  All  cash  available  for
distribution  will be distributed to the partners  pursuant to the provisions of
the Partnership Agreement.

         For each of the years ended December 31, 1998 and 1997, the Partnership
declared cash distributions of $2,700,000 to the Limited Partners. Distributions
of $675,000  were  declared at the close of each of the  Partnership's  calendar
quarters during 1998 and 1997 to the Limited Partners. No amounts distributed to
partners for the years ended  December 31, 1998 and 1997,  are required to be or
have been  treated by the  Partnership  as a return of capital  for  purposes of
calculating   the   Limited   Partners'   return  on  their   adjusted   capital
contributions.  No distributions have been made to the General Partners to date.
As indicated in the chart below, these  distributions were declared at the close
of each of the Partnership's  calendar  quarters.  These amounts include monthly
distributions  made in arrears  for the  Limited  Partners  electing  to receive
distributions on this basis.

         The  Partnership  intends to  continue  to make  distributions  of cash
available  for  distribution  to the  Limited  Partners  on a  quarterly  basis,
although some Limited  Partners,  in  accordance  with their  election,  receive
monthly distributions, for an annual fee.


Item 6.  Selected Financial Data
<TABLE>
<CAPTION>

                                             1998           1997            1996           1995           1994
                                         -------------- --------------  -------------  -------------  --------------
<S> <C>
Year ended December 31:
     Revenues (1)                          $ 2,948,217   $ 2,919,734     $ 2,882,709    $ 2,716,883     $ 2,917,331
     Net income (2)                          2,466,018     2,606,008       2,326,863      1,982,148       2,503,300
     Cash distributions declared (3)         2,700,000     2,700,000       2,700,000      2,700,002       2,760,002
     Net income per Unit (2)                     0.081         0.086           0.077          0.065           0.083
     Cash distributions declared
         per Unit (3)                            0.090         0.090           0.090          0.090           0.092

At December 31:
     Total assets                          $25,218,258   $25,479,762     $25,523,853    $25,915,616     $26,644,363
     Partners' capital                      24,313,796    24,547,778      24,641,770     25,014,907      25,732,761
</TABLE>

(1)      Revenues  include equity in earnings of  unconsolidated  joint ventures
         and minority interest in income of the consolidated joint venture.

(2)      Net income for the years ended December 31, 1998, 1997, 1996, 1995, and
         1994,  includes  $1,025,  $184,627,   $195,675,  $1,421,  and  $77,379,
         respectively,  from gains on  dispositions  of land and buildings.  Net
         income for the years ended December 31, 1997, 1996, and 1995,  includes
         a loss on sale of land and building of $19,739,  $235,465,  and $6,556,
         respectively.  In addition,  net income for the year ended December 31,
         1995, includes a loss on demolition of building of $174,466.

(3)      Distributions  for the year ended December 31, 1994,  include a special
         distribution  to the  Limited  Partners  of $60,000  which  represented
         cumulative excess operating reserves.

         The above selected  financial  data should be read in conjunction  with
the financial statements and related notes contained in Item 8 hereof.


Item 7.   Management's Discussion and Analysis of Financial Condition and
          Results of Operations

         The  Partnership was organized on August 18, 1989, to acquire for cash,
either directly or through joint venture  arrangements,  both newly  constructed
and  existing  restaurant  Properties,  as well as land  upon  which  restaurant
Properties  were to be constructed,  which are leased  primarily to operators of
selected national and regional fast-food and family-style Restaurant Chains. The
leases are generally  triple-net leases, with the lessees generally  responsible
for all repairs and maintenance,  property taxes, insurance and utilities. As of
December 31, 1998,  the  Partnership  owned 40  Properties,  either  directly or
indirectly through joint venture arrangements.

Liquidity and Capital Resources

         The  Partnership's  primary  source  of  capital  for the  years  ended
December 31, 1998, 1997, and 1996, was cash from operations (which includes cash
received from tenants,  distributions from joint ventures and interest received,
less cash paid for expenses).  Cash from operations was $2,790,975,  $2,840,459,
and  $2,670,869  for  the  years  ended  December  31,  1998,  1997,  and  1996,
respectively.  The decrease in cash from operations  during 1998, as compared to
1997, is primarily a result of changes in the Partnership's working capital. The
increase in cash from operations  during 1997, as compared to 1996, is primarily
a result of  changes  in  income  and  expenses  as  described  in  "Results  of
Operations" below and changes in the Partnership's working capital.

         Other  sources and uses of capital  included the  following  during the
years ended December 31, 1998, 1997, and 1996.

         In March 1996,  the  Partnership  entered  into an  agreement  with the
tenant of the Property in Daytona Beach,  Florida, for payment of certain rental
payment  deferrals the  Partnership  had granted to the tenant through March 31,
1996. Under the agreement, the Partnership agreed to abate approximately $13,200
of  the  rental  payment   deferral   amounts.   The  tenant  made  payments  of
approximately  $5,700  in each of April  1996,  March  1997,  and  June  1998 in
accordance  with  the  terms  of the  agreement,  and  has  agreed  to  pay  the
Partnership the remaining balance due of approximately $22,300 in four remaining
annual installments through 2002.

         In July 1996, the  Partnership  sold its Property in Colorado  Springs,
Colorado,  for  $1,075,000,  and  received  net sales  proceeds  of  $1,044,909,
resulting in a gain of $194,839 for financial reporting purposes.  This Property
was  originally  acquired  by the  Partnership  in July  1990  and had a cost of
approximately $900,900, excluding acquisition fees and miscellaneous acquisition
expenses;  therefore,  the  Partnership  sold  the  Property  for  approximately
$144,000  in excess  of its  original  purchase  price.  In  October  1996,  the
Partnership reinvested the net sales proceeds, along with additional funds, in a
Boston  Market  Property  located  in  Marietta,   Georgia.  A  portion  of  the
transaction relating to the sale of the Property in Colorado Springs,  Colorado,
and the  reinvestment  of the net sales proceeds were structured to qualify as a
like-kind  exchange  transaction in accordance with Section 1031 of the Internal
Revenue  Code.  The  Partnership  distributed  amounts  sufficient to enable the
Limited Partners to pay federal and state income taxes resulting from the sale.

         In addition,  in October  1996,  the  Partnership  sold its Property in
Hartland,  Michigan,  for $625,000 and received net sales  proceeds of $617,035,
resulting in a loss of approximately $235,465, for financial reporting purposes.
In February  1997,  the  Partnership  reinvested  the net sales  proceeds in CNL
Mansfield  Joint  Venture.  The  Partnership  has a 79 percent  interest  in the
profits and losses of CNL Mansfield Joint Venture and the remaining  interest in
this joint venture is held by an affiliate of the Partnership which has the same
General Partners.

         In May 1997, the  Partnership  sold its Property in Columbus,  Indiana,
for $240,000 and received net sales proceeds of $223,589, resulting in a loss of
$19,739 for financial  reporting  purposes.  In December 1997,  the  Partnership
reinvested the net sales proceeds, along with additional funds, in a Property in
Miami, Florida, as tenants-in-common  with affiliates of the General Partner, in
exchange for a 35.64% interest in this Property.

         In October  1997,  the  Partnership  sold its  Property  in  Dunnellon,
Florida,  for  $800,000 and  received  net sales  proceeds  (net of $5,055 which
represents  amounts  due to the former  tenant for  prepaid  rent) of  $752,745,
resulting in a gain of $183,701 for financial reporting purposes.  This Property
was  originally  acquired  by the  Partnership  in August 1990 and had a cost of
approximately $546,300, excluding acquisition fees and miscellaneous acquisition
expenses;  therefore,  the  Partnership  sold  the  Property  for  approximately
$211,500  in excess of its  original  purchase  price.  In  December  1997,  the
Partnership  reinvested  these net sales  proceeds in a Property in  Smithfield,
North Carolina,  as tenants-in-common  with an affiliate of the General Partner.
The  General  Partners  believe  that the  transaction,  or a  portion  thereof,
relating to the sale of the Property in Dunnellon,  Florida and the reinvestment
of the net sales proceeds in the Property in Smithfield,  North  Carolina,  will
qualify as a like-kind  exchange  transaction in accordance with Section 1031 of
the Internal  Revenue Code.  However,  the Partnership  will distribute  amounts
sufficient to enable the Limited Partners to pay federal and state income taxes,
if any, (at a level reasonably  assumed by the General Partners)  resulting from
the sale.



<PAGE>


         In addition,  in October 1997,  the  Partnership  and an affiliate,  as
tenants-in-common,  sold the Property in Yuma, Arizona, in which the Partnership
owned a 48.33% interest,  for a total sales price of $1,010,000 and received net
sales proceeds of $982,025,  resulting in a gain, to the  tenancy-in-common,  of
approximately  $128,400  for  financial  reporting  purposes.  The  Property was
originally acquired in July 1994 and had a total cost of approximately $861,700,
excluding acquisition fees and miscellaneous  acquisition  expenses;  therefore,
the  Property  was sold for  approximately  $120,300  in excess of its  original
purchase price. In December 1997, the Partnership  reinvested its portion of the
net sales  proceeds  from the sale of the Yuma,  Arizona,  Property,  along with
funds from the sale of the  wholly-owned  Property in  Columbus,  Indiana,  in a
Property in Miami, Florida, as tenants-in-common  with affiliates of the General
Partners.  The  General  Partners  believe  that the  transaction,  or a portion
thereof,  relating  to the  sale  of the  Property  in  Yuma,  Arizona  and  the
reinvestment of the net sales proceeds in the Property in Miami,  Florida,  will
qualify as a like-kind  exchange  transaction in accordance with Section 1031 of
the Internal  Revenue Code.  However,  the Partnership  will distribute  amounts
sufficient to enable the Limited Partners to pay federal and state income taxes,
if any, (at a level reasonably  assumed by the General Partners)  resulting from
the sale.

         None of the Properties  owned by the  Partnership or the joint ventures
in which the  Partnership  owns an interest is or may be  encumbered.  Under its
Partnership  Agreement,  the  Partnership  is prohibited  from borrowing for any
purpose;  provided,  however,  that the General Partners or their affiliates are
entitled to reimbursement,  at cost, for actual expenses incurred by the General
Partners or their  affiliates  on behalf of the  Partnership.  Affiliates of the
General Partners from time to time incur certain operating expenses on behalf of
the  Partnership  for which the  Partnership  reimburses the affiliates  without
interest.

         Currently,  rental income from the Partnership's Properties is invested
in money market accounts or other short-term,  highly liquid investments pending
the  Partnership's  use of  such  funds  to pay  Partnership  expenses  or  make
distributions  to the  partners.  At December  31,  1998,  the  Partnership  had
$856,825  invested in such  short-term  investments,  as compared to $761,317 at
December 31, 1997.  The funds  remaining at December 31, 1998,  will be used for
the payment of distributions and other liabilities.

         During  1998,  1997,  and  1996,  affiliates  of the  General  Partners
incurred  on  behalf  of  the  Partnership   $86,851,   $74,968,   and  $97,288,
respectively,  for certain operating expenses. As of December 31, 1998 and 1997,
the Partnership owed $17,911 and $27,683,  respectively,  to affiliates for such
amounts and accounting and  administrative  services.  As of March 11, 1999, the
Partnership had reimbursed the affiliates all such amounts.  In addition,  as of
December  31,  1998  and  1997,  the  Partnership  owed  $7,200  in real  estate
disposition  fees to an affiliate as a result of its services in connection with
the 1995 sale of the Property in Jacksonville, Florida. The payment of such fees
is  deferred  until the  Limited  Partners  have  received  the sum of their 10%
Preferred Return and their adjusted capital  contributions.  Total  liabilities,
including  distributions  payable,  of the Partnership  decreased to $732,746 at
December 31, 1998, from $749,587 at December 31, 1997 primarily as a result of a
decrease in rents paid in advance at December  31,  1998.  The General  Partners
believe that the  Partnership  has  sufficient  cash on hand to meet its current
working capital needs.

         Based  primarily  on cash from  operations,  the  Partnership  declared
distributions  to the Limited Partners of $2,700,000 for each of the years ended
December 31, 1998,  1997, and 1996. This represents  distributions of $0.090 per
Unit for each of the years ended  December 31, 1998,  1997, and 1996. No amounts
distributed to the Limited Partners for the years ended December 31, 1998, 1997,
and 1996 are required to be or have been treated by the  Partnership as a return
of capital for purposes of  calculating  the Limited  Partners'  return on their
adjusted  capital  contributions.  The  Partnership  intends to continue to make
distributions  of cash available for  distribution to the Limited  Partners on a
quarterly basis.

         The General Partners believe that the Properties are adequately covered
by  insurance.  In  addition,  the General  Partners  have  obtained  contingent
liability and property coverage for the Partnership.  This insurance is intended
to reduce the Partnership's  exposure in the unlikely event a tenant's insurance
policy lapses or is insufficient to cover a claim relating to the Property.

         The Partnership's  investment strategy of acquiring Properties for cash
and  leasing  them under  triple-net  leases to  operators  who  generally  meet
specified financial  standards  minimizes the Partnership's  operating expenses.
The General Partners believe that the leases will continue to generate cash flow
in excess of operating expenses.



<PAGE>


         Due to low  operating  expenses  and  ongoing  cash flow,  the  General
Partners believe that the Partnership has sufficient working capital reserves at
this time. In addition,  because all leases of the Partnership's  Properties are
on a  triple-net  basis,  it is not  anticipated  that a  permanent  reserve for
maintenance  and  repairs  will be  established  at this  time.  To the  extent,
however,  that the Partnership  has  insufficient  funds for such purposes,  the
General Partners will contribute to the Partnership an aggregate amount of up to
one percent of the offering proceeds for maintenance and repairs.

         The General  Partners have the right,  but not the obligation,  to make
additional capital  contributions if they deem it appropriate in connection with
the operations of the Partnership.

         On March 11, 1999, the  Partnership  entered into an Agreement and Plan
of Merger with APF,  pursuant to which the Partnership  would be merged with and
into a subsidiary  of APF. As  consideration  for the Merger,  APF has agreed to
issue  3,202,371  APF Shares  which,  for the  purposes  of  valuing  the merger
consideration,  have been valued by APF at $10.00 per APF Share,  the price paid
by APF  investors in APF's most recent public  offering.  In order to assist the
General  Partners in evaluating the proposed merger  consideration,  the General
Partners  retained  Valuation  Associates,  a nationally  recognized real estate
appraisal firm, to appraise the  Partnership's  restaurant  property  portfolio.
Based on Valuation Associates'  appraisal,  the Partnership's property portfolio
and other assets were valued on a going concern basis  (meaning the  Partnership
continues  unchanged) at  $31,543,529  as of December 31, 1998.  Legg Mason Wood
Walker,  Incorporated  has  rendered  a  fairness  opinion  that  the APF  Share
consideration, payable by APF, is fair to the Partnership from a financial point
of view.  The APF Shares are  expected  to be listed for trading on the New York
Stock Exchange concurrently with the consummation of the Merger, and, therefore,
would be freely  tradable  at the option of the former  Limited  Partners.  At a
special meeting of the partners that is expected to be held in the third quarter
of  1999,  Limited  Partners  holding  in  excess  of 50%  of the  Partnership's
outstanding  limited  partnership  interests  must  approve the Merger  prior to
consummation of the  transaction.  The General Partners intend to recommend that
the Limited Partners of the Partnership  approve the Merger.  In connection with
their  recommendation,  the  General  Partners  will  solicit the consent of the
Limited Partners at the special meeting.

Results of Operations

         During 1996, the Partnership and its  consolidated  joint venture,  San
Antonio  #849  Joint  Venture,  owned  and  leased 33  wholly  owned  Properties
(including two Properties in Colorado Springs, Colorado, and Hartland, Michigan,
which  were sold in July and  October  1996,  respectively),  during  1997,  the
Partnership and its consolidated joint venture,  San Antonio #849 Joint Venture,
owned  and  leased 31 wholly  owned  Properties  (including  two  Properties  in
Columbus,  Indiana and  Dunnellon,  Florida,  which were sold in May and October
1997, respectively), and during 1998, the Partnership and its consolidated joint
venture,  San  Antonio  #849 Joint  Venture,  owned and  leased 29 wholly  owned
Properties. In addition, during 1996, the Partnership and its consolidated joint
venture,  San Antonio #849 Joint  Venture,  was a co-venturer  in three separate
joint ventures which owned and leased eight  Properties and owned and leased one
Property with an affiliate as  tenants-in-common.  During 1997, the  Partnership
and its  consolidated  joint  venture,  San Antonio  #849 Joint  Venture,  was a
co-venturer  in four  separate  joint  ventures  which  owned  and  leased  nine
Properties   and  owned  and  leased  three   Properties   with   affiliates  as
tenants-in-common  (including  one Property in Yuma,  Arizona  which was sold in
October  1997),  and during 1998, the  Partnership  and its  consolidated  joint
venture,  San Antonio #849 Joint  Venture,  was a  co-venturer  in four separate
joint ventures  which owned and leased nine  Properties and owned and leased two
Properties  with affiliates as  tenants-in-common.  As of December 31, 1998, the
Partnership and its consolidated joint venture,  San Antonio #849 Joint Venture,
owned (either directly, as tenants-in-common  with an affiliate or through joint
venture  arrangements) 40 Properties  which are generally  subject to long-term,
triple-net  leases. The leases of the Properties provide for minimum base annual
rental  amounts  (payable in monthly  installments)  ranging from  approximately
$22,100 to $191,900. Substantially all of the leases provide for percentage rent
based on sales in excess of a specified amount. In addition,  some of the leases
provide that,  commencing in the specified lease years  (generally  ranging from
the sixth to the eleventh  lease year),  the annual base rent required under the
terms of the lease will increase.  For further  description of the Partnership's
leases and  Properties,  see Item 1.  Business - Leases and Item 2.  Properties,
respectively.

         During  the  years  ended  December  31,  1998,  1997,  and  1996,  the
Partnership and its consolidated joint venture,  San Antonio #849 Joint Venture,
earned $2,390,557,  $2,436,222, and $2,459,094,  respectively,  in rental income
from  operating  leases and earned  income from  direct  financing  leases.  The
decrease in rental and earned income  during 1998 and 1997,  each as compared to
the previous year, was attributable to a decrease in rental and earned income as
a result of the sales of the Properties in Colorado Springs, Colorado; Hartland,
Michigan; Columbus, Ohio and Dunnellon, Florida, in July 1996, October 1996, May
1997 and October 1997, respectively.  The decrease in 1997, as compared to 1996,
was  partially  offset by an increase in rental and earned income as a result of
reinvesting  the net sales  proceeds  from the sale of the Property in Colorado,
Springs,  Colorado, in a Property in Marietta,  Georgia, in October 1996. Rental
and earned income are expected to remain at reduced amounts in future years as a
result of reinvesting the proceeds from the sales of the Properties in Hartland,
Michigan;  Columbus,  Ohio  and  Dunnellon,  Florida  in joint  ventures  and in
Properties  owned with  affiliates,  as  tenants-in-common,  as described below.
However,  as a result of reinvesting  in joint ventures and in Properties  owned
with affiliates, as tenants-in-common, net income earned by unconsolidated joint
ventures increased in 1998, as described below.

         For the years ended December 31, 1998,  1997 and 1996, the  Partnership
also earned  $93,906,  $51,345,  $44,973,  respectively,  in  contingent  rental
income.  The increase in contingent  rental income during 1998 and 1997, each as
compared to the previous year, is primarily a result of increased gross sales of
certain restaurant Properties requiring the payment of contingent rental income.

         During  the  years  ended  December  31,  1998,  1997,  and  1996,  the
Partnership earned $171,263, $183,579, $240,079,  respectively,  in interest and
other income. The decrease in interest and other income for 1997, as compared to
1996, is partially  attributable  to the fact that during 1996, the  Partnership
recognized  approximately  $46,500  in other  income  due to the  fact  that the
corporate franchisor of the Properties in Pueblo and Colorado Springs, Colorado,
paid past due real estate taxes relating to the  Properties and the  Partnership
reversed  such  amounts  during 1996 that it had  previously  accrued as payable
during 1995. In addition, the decrease in interest and other income during 1997,
as  compared  to 1996,  was due to the fact that during  1996,  the  Partnership
earned  approximately  $10,000 in interest income on the net sales proceeds held
in escrow relating to the Property in Colorado Springs, Colorado. These proceeds
were reinvested in a Property in Marietta, Georgia, in October 1996.

         For the years ended December 31, 1998,  1997, and 1996, the Partnership
also earned  $311,081,  $267,251,  $157,254,  respectively,  attributable to net
income earned by  unconsolidated  joint  ventures in which the  Partnership is a
co-venturer    and   Properties    owned    indirectly    with   affiliates   as
tenants-in-common.  The increase in net income earned by joint  ventures  during
the year ended 1998,  as compared to 1997,  is partially due to the fact that in
February  1997,  the  Partnership  reinvested the net sales proceeds it received
from the sale, in October 1996,  of the Property in Hartland,  Michigan,  in CNL
Mansfield Joint Venture, with an affiliate of the Partnership which has the same
General  Partners.  In  addition,  the  increase  in net income  earned by joint
ventures  during the year ended 1998,  as compared to 1997,  is partially due to
the  Partnership  investing  in a Property in  Smithfield,  North  Carolina,  in
December 1997, with affiliates of the General Partners as tenants-in-common,  as
described above in "Liquidity and Capital Resources." In addition,  the increase
in net income earned by joint ventures during 1998 was partially  offset by, and
the increase in net income earned by joint ventures  during 1997, as compared to
1996,  is  partially  attributable  to,  the  fact  that in  October  1997,  the
Partnership and an affiliate,  as tenants-in-common,  sold the Property in Yuma,
Arizona, in which the Partnership owned a 48.33% interest. The tenancy-in-common
recognized a gain of approximately $128,400 for financial reporting purposes, as
described above in "Liquidity and Capital Resources."

         During  the  year  ended  December  31,  1998,  three  lessees  of  the
Partnership  and its  consolidated  joint  venture,  Golden Corral  Corporation,
Restaurant Management Services,  Inc., and Waving Leaves, Inc., each contributed
more than ten percent of the Partnership's total rental income (including rental
income from the Partnership's  consolidated  joint venture and the Partnership's
share of  rental  income  from nine  Properties  owned by  unconsolidated  joint
ventures and two Properties owned with affiliates as  tenants-in-common).  As of
December  31,  1998,  Golden  Corral  Corporation  was the lessee  under  leases
relating to five  restaurants,  Restaurant  Management  Services,  Inc.  was the
lessee  under  leases  relating  to seven  restaurants  and one  site  currently
consisting  of land only,  and Waving  Leaves,  Inc. was the lessee under leases
relating  to four  restaurants.  It is  anticipated  that,  based on the minimum
rental payments  required by the leases,  these three lessees each will continue
to  contribute  more than ten percent of the  Partnership's  total rental income
during  1999.  In  addition,  during the year ended  December  31,  1998,  three
Restaurant Chains, Golden Corral,  Hardee's, and Burger King, each accounted for
more than ten percent of the Partnership's total rental income (including rental
income from the Partnership's  consolidated  joint venture and the Partnership's
share of  rental  income  from nine  Properties  owned by  unconsolidated  joint
ventures and two  Properties  owned with  affiliates as  tenants-in-common).  In
1999, it is anticipated that these three Restaurant Chains each will continue to
account for more than ten percent of the  Partnership's  total rental  income to
which the Partnership is entitled under the terms of the leases.  Any failure of
these lessees or Restaurant  Chains could  materially  affect the  Partnership's
income if the  Partnership  is not able to re-lease the  Properties  in a timely
manner.

         Operating expenses,  including  depreciation and amortization  expense,
were  $483,224,  $478,614,  and $516,056 for the years ended  December 31, 1998,
1997, and 1996, respectively. The increase in operating expenses during 1998, as
compared to 1997, is primarily a result of the Partnership  incurring $18,781 in
transaction costs relating to the General Partners retaining financial and legal
advisors to assist them in evaluating and  negotiating  the proposed Merger with
APF, as described  above in "Liquidity  and Capital  Resources."  If the Limited
Partners  reject  the  Merger,  the  Partnership  will bear the  portion  of the
transaction  costs  based upon the  percentage  of "For"  votes and the  General
Partners  will  bear  the  portion  of such  transaction  costs  based  upon the
percentage  of  "Against"  votes and  abstentions.  The  increase  in  operating
expenses during 1998, as compared to 1997, is partially  offset be a decrease in
general operating and administrative expenses.

         The decrease in operating  expenses  during 1997,  as compared to 1996,
was primarily a result of a decrease in accounting and  administrative  expenses
associated with operating the Partnership and its Properties.  In addition,  the
decrease in operating  expenses during 1997, as compared to 1996, was due to the
fact that in July 1996, the Partnership  sold the Property in Colorado  Springs,
Colorado,  as  discussed  above in  "Liquidity  and Capital  Resources,"  and in
connection therewith,  paid approximately $9,000 in 1996 real estate taxes which
were due upon the sale of the  Property.  Because  of the sale,  no real  estate
taxes were recorded in 1997.

         The decrease in operating  expenses  during 1997,  as compared to 1996,
was also partially attributable to a decrease in depreciation expense due to the
sales of the Properties in Hartland,  Michigan and Colorado Springs, Colorado in
1996. The decrease in depreciation  expense was partially offset by the purchase
of the Property in Marietta, Georgia, in October 1996.

         In  connection  with  the  sale  of its  Property  in  Florence,  South
Carolina, during 1995, the Partnership recognized a gain for financial reporting
purposes of $1,025,  $926, $836 for the years ended December 31, 1998, 1997, and
1996,  respectively.  In  accordance  with  Statement  of  Financial  Accounting
Standards  No.  66,  "Accounting  for  Sales of Real  Estate,"  the  Partnership
recorded the sale using the installment  sales method. As such, the gain on sale
was deferred and is being recognized as income proportionately as payments under
the mortgage note are collected.  Therefore, the balance of the deferred gain of
$125,278 at December 31, 1998 is being recognized as income in future periods as
payments are collected. For federal income tax purposes, a gain of approximately
$97,300  from the sale of this  Property  was also  deferred  during 1995 and is
being recognized as payments under the mortgage note are collected.

         As a result of the sale of the  Property in Columbus,  Indiana,  during
1997, as described  above in "Liquidity and Capital  Resources," the Partnership
recognized  a loss of $19,739 for  financial  reporting  purposes,  for the year
ended  December 31, 1997.  As a result of the sale of the Property in Dunnellon,
Florida,   as  described  above  in  "Liquidity  and  Capital   Resources,"  the
Partnership  recognized a gain for financial  reporting purposes of $183,701 for
the year ended December 31, 1997.

         As a result of the sale of the Property in Colorado Springs,  Colorado,
during 1996,  as  described  above in  "Liquidity  and Capital  Resources,"  the
Partnership  recognized a gain of $194,839 for financial  reporting purposes for
the year ended  December  31,  1996.  As a result of the sale of the Property in
Hartland, Michigan, as described above in "Liquidity and Capital Resources," the
Partnership  recognized a loss for financial  reporting purposes of $235,465 for
the year ended December 31, 1996.

         The  Partnership's  leases  as of  December  31,  1998,  are  generally
triple-net  leases and  contain  provisions  that the General  Partners  believe
mitigate  the adverse  effect of  inflation.  Such  provisions  include  clauses
requiring the payment of percentage rent based on certain restaurant sales above
a specified  level and/or  automatic  increases in base rent at specified  times
during the term of the lease.  Inflation has had a minimal effect on income from
operations. Management expects that increases in restaurant sales volumes due to
inflation  and real sales growth  should  result in an increase in rental income
over  time.  Continued  inflation  also may cause  capital  appreciation  of the
Partnership's Properties.  Inflation and changing prices, however, also may have
an  adverse  impact on the sales of the  restaurants  and on  potential  capital
appreciation of the Properties.



<PAGE>


Year 2000

         The Year 2000 problem is the result of information  technology  systems
and embedded  systems  (products which are made with  microprocessor  (computer)
chips such as HVAC systems,  physical  security  systems and elevators)  using a
two-digit  format,  as  opposed  to four  digits,  to  indicate  the year.  Such
information  technology and embedded systems may be unable to properly recognize
and process date-sensitive information beginning January 1, 2000.

         The  Partnership  currently  does not have any  information  technology
systems.  Affiliates of the General Partners provide all services  requiring the
use of information  technology  systems pursuant to a management  agreement with
the  Partnership.   The  maintenance  of  embedded  systems,   if  any,  at  the
Partnership's  Properties is the responsibility of the tenants of the Properties
in accordance with the terms of the Partnership's  leases.  The General Partners
and  affiliates  have  established  a team  dedicated to reviewing  the internal
information technology systems used in the operation of the Partnership, and the
information  technology and embedded  systems and the Year 2000 compliance plans
of the Partnership's tenants, significant suppliers,  financial institutions and
transfer agent.

         The  information  technology  infrastructure  of the  affiliates of the
General  Partners  consists of a network of personal  computers and servers that
were  obtained   from  major   suppliers.   The   affiliates   utilize   various
administrative  and financial  software  applications on that  infrastructure to
perform the business functions of the Partnership.  The inability of the General
Partners  and  affiliates  to identify  and timely  correct  material  Year 2000
deficiencies  in  the  software  and/or   infrastructure   could  result  in  an
interruption in, or failure of, certain of the Partnership's business activities
or operations.  Accordingly,  the General Partners and affiliates have requested
and  are  evaluating  documentation  from  the  suppliers  of the  software  and
infrastructure  of the  affiliates  regarding the Year 2000  compliance of their
products  that  are  used  in  the  business  activities  or  operations  of the
Partnership.   The  General  Partners  and  affiliates  have  not  yet  received
sufficient certifications to be assured that the suppliers have fully considered
and mitigated any potential material impact of the Year 2000  deficiencies.  The
costs  expected to be incurred by the General  Partners and affiliates to become
Year 2000  compliant  will be incurred by the General  Partners and  affiliates;
therefore,  these  costs  will  have no impact  on the  Partnership's  financial
position or results of operations.

         The  Partnership  has  material  third  party  relationships  with  its
tenants,  financial  institutions and transfer agent. The Partnership depends on
its  tenants  for  rents  and  cash  flows,   its  financial   institutions  for
availability  of cash and its  transfer  agent to  maintain  and track  investor
information.  If any of these third parties are unable to meet their obligations
to the  Partnership  because of the Year 2000  deficiencies,  such a failure may
have a material impact on the  Partnership.  Accordingly,  the General  Partners
have requested and are evaluating  documentation from the Partnership's tenants,
financial  institutions,   and  transfer  agent  relating  to  their  Year  2000
compliance  plans.  The  General  Partners  have  not  yet  received  sufficient
certifications  to be assured  that the  tenants,  financial  institutions,  and
transfer agent have fully considered and mitigated any potential material impact
of the Year 2000 deficiencies.  Therefore,  the General Partners do not, at this
time,  know of the potential  costs to the  Partnership of any adverse impact or
effect of any Year 2000 deficiencies by these third parties.

         The General  Partners  currently  expect that all year 2000  compliance
testing  and any  necessary  remedial  measures  on the  information  technology
systems used in the business  activities and operations of the Partnership  will
be completed prior to June 30, 1999.  Based on the progress the General Partners
and affiliates  have made in identifying and addressing the  Partnership's  Year
2000 issues and the plan and timeline to complete the  compliance  program,  the
General  Partners  do  not  foresee   significant   risks  associated  with  the
Partnership's  Year 2000 compliance at this time.  Because the General  Partners
and affiliates are still  evaluating  the status of the  information  technology
systems used in business  activities and operations of the  Partnership  and the
systems of the third parties with which the  Partnership  conducts its business,
the General Partners have not yet developed a comprehensive contingency plan and
are unable to identify "the most reasonably  likely worst case scenario" at this
time.  If  the  General  Partners  identify  significant  risks  related  to the
Partnership's  Year 2000 compliance or if the Partnership's Year 2000 compliance
program's  progress deviates  substantially from the anticipated  timeline,  the
General Partners will develop appropriate contingency plans.



<PAGE>


Interest Rate Risk

         The  Partnership  has provided  fixed rate mortgage notes to borrowers.
The General Partners believe that the estimated fair value of the mortgage notes
at  December  31, 1998  approximated  the  outstanding  principal  amounts.  The
Partnership is exposed to equity loss in the event of changes in interest rates.
The  following  table  presents  the expected  cash flows of principal  that are
sensitive to these changes.

                                                              Mortgage notes
                                                                Fixed Rates
                                                             ------------------

                    1999                                             $  11,968
                    2000                                             1,114,132
                    2001                                                 2,195
                    2002                                                 2,425
                    2003                                                 2,679
                    Thereafter                                         224,478
                                                             ------------------

                                                                   $ 1,357,877
                                                             ==================

Item 7A.   Quantitative and Qualitative Disclosures About Market Risk

         The information is described above in Item 7.  Management's  Discussion
and Analysis of Financial  Condition  and Results of Operations -- Interest Rate
Risk.


Item 8.   Financial Statements and Supplementary Data


<PAGE>


                            CNL INCOME FUND VII, LTD.
                         (A Florida Limited Partnership)

                                    CONTENTS







                                                    Page

Report of Independent Accountants                       

Financial Statements:

  Balance Sheets                                        

  Statements of Income                                  

  Statements of Partners' Capital                       

  Statements of Cash Flows                              

  Notes to Financial Statements                         


<PAGE>






                        Report of Independent Accountants


To the Partners
CNL Income Fund VII, Ltd.


In our opinion,  the financial  statements  listed in the index  appearing under
item 14(a)(1) present fairly, in all material  respects,  the financial position
of CNL Income Fund VII,  Ltd. (a Florida  limited  partnership)  at December 31,
1998 and 1997,  and the results of its operations and its cash flows for each of
the three  years in the  period  ended  December  31,  1998 in  conformity  with
generally  accepted  accounting  principles.  In addition,  in our opinion,  the
financial  statement schedules listed in the index appearing under item 14(a)(2)
present fairly, in all material respects, the information set forth therein when
read in  conjunction  with the related  financial  statements.  These  financial
statements  and  financial  statement  schedules are the  responsibility  of the
Partnership's  management;  our responsibility is to express an opinion on these
financial  statements and financial  statement schedules based on our audits. We
conducted our audits of these  statements in accordance with generally  accepted
auditing  standards  which  require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the  amounts  and  disclosures  in  the  financial  statements,   assessing  the
accounting  principles  used and significant  estimates made by management,  and
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for the opinion expressed above.








Orlando, Florida
January 25, 1999, except for Note 11 for which the date is March 11, 1999



<PAGE>


                            CNL INCOME FUND VII, LTD.
                         (A Florida Limited Partnership)

                                 BALANCE SHEETS
<TABLE>
<CAPTION>

                                                                                          December 31,
                                                                                  1998                    1997
                                                                             ----------------        ----------------
<S> <C>
                          ASSETS

Land and buildings on operating leases, less
    accumulated depreciation                                                       $15,078,507             $15,382,863
Net investment indirect financing leases                                             3,365,392               3,447,152
Investment in joint ventures                                                         3,327,934               3,393,932
Mortgage notes receivable, less deferred gain                                        1,241,056               1,250,597
Cash and cash equivalents                                                              856,825                 761,317
Receivables, less allowance for doubtful
    accounts of $28,853 and $32,959                                                     78,478                  64,092
Prepaid expenses                                                                         4,116                   4,755
Accrued rental income, less allowance for
    doubtful accounts of $9,845 in 1998
    and 1997                                                                         1,205,528               1,114,632
Other assets                                                                            60,422                  60,422
                                                                              -----------------       -----------------

                                                                                   $25,218,258             $25,479,762
                                                                              =================       =================


                     LIABILITIES AND PARTNERS' CAPITAL

Accounts payable                                                                     $   2,885               $   6,131
Escrowed real estate taxes payable                                                       5,834                   7,785
Distributions payable                                                                  675,000                 675,000
Due to related parties                                                                  25,111                  34,883
Rents paid in advance and deposits                                                      49,027                  60,671
                                                                              -----------------       -----------------
    Total liabilities                                                                  757,857                 784,470

Minority interest                                                                      146,605                 147,514

Partners' capital                                                                   24,313,796              24,547,778
                                                                              -----------------       -----------------

                                                                                   $25,218,258             $25,479,762
                                                                              =================       =================

</TABLE>

                 See accompanying notes to financial statements.


<PAGE>


                            CNL INCOME FUND VII, LTD.
                         (A Florida Limited Partnership)

                              STATEMENTS OF INCOME
<TABLE>
<CAPTION>

                                                                            Year Ended December 31,
                                                                1998                 1997                 1996
                                                            --------------       --------------       --------------
<S> <C>
Revenues:
    Rental income from operating leases                      $  1,976,709         $  1,960,724         $  1,954,033
    Earned income from direct financing   
      leases                                                      413,848              475,498              505,061
    Contingent rental income                                       93,906               51,345               44,973
    Interest and other income                                     171,263              183,579              240,079
                                                            --------------       --------------       --------------
                                                                2,655,726            2,671,146            2,744,146
                                                            --------------       --------------       --------------
Expenses:
    General operating and administrative                          133,915              143,173              159,001
    Professional services                                          23,443               23,546               27,640
    Real estate taxes                                                  --                2,979                9,010
    State and other taxes                                           2,729                4,560                2,448
    Depreciation                                                  304,356              304,356              317,957
    Transaction costs                                              18,781                   --                   --
                                                            --------------       --------------       --------------
                                                            --------------       --------------       --------------
                                                                  483,224              478,614              516,056
                                                            --------------       --------------       --------------

Income Before Minority Interest in Income  of
    Consolidated Joint Venture, Equity in
    Earnings of Unconsolidated Joint
    Ventures, and Gain (Loss) on Sale of Land
    and Buildings                                               2,172,502            2,192,532            2,228,090

Minority Interest in Income of  Consolidated
    Joint Venture                                                 (18,590 )           (18,663)             (18,691)

Equity in Earnings of Unconsolidated Joint
    Ventures                                                      311,081              267,251              157,254

Gain (Loss) on Sale of Land and Buildings                           1,025              164,888             (39,790)
                                                            --------------       --------------       --------------

Net Income                                                   $  2,466,018         $  2,606,008         $  2,326,863
                                                            ==============       ==============       ==============

Allocation of Net Income:
    General partners                                          $    24,659          $    24,300          $    23,586
    Limited partners                                            2,441,359            2,581,708            2,303,277
                                                            --------------       --------------       --------------

                                                             $  2,466,018         $  2,606,008         $  2,326,863
                                                            ==============       ==============       ==============

Net Income Per Limited Partner Unit                            $    0.081           $    0.086           $    0.077
                                                            ==============       ==============       ==============

Weighted Average Number of
    Limited Partner Units Outstanding                          30,000,000           30,000,000           30,000,000
                                                            ==============       ==============       ==============
</TABLE>


                 See accompanying notes to financial statements.


<PAGE>


                            CNL INCOME FUND VII, LTD.
                         (A Florida Limited Partnership)

                         STATEMENTS OF PARTNERS' CAPITAL

                  Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>

                                    General Partners                          Limited Partners
                              ---------------------------  ----------------------------------------------------------
                                             Accumulated                                  Accumulated    Syndication
                              Contributions    Earnings    Contributions  Distributions     Earnings        Costs          Total
                              -------------  ------------  -------------  -------------   ------------   ------------   ------------
<S> <C>
Balance, December 31, 1995    $     1,000    $   132,199   $ 30,000,000   $(14,777,623)   $ 13,099,331   $(3,440,000)   $25,014,907

    Distributions to limited
       partners ($0.090 per
       limited partner unit)           --             --             --     (2,700,000)             --             --   (2,700,000)
    Net income                         --         23,586             --              --      2,303,277             --     2,326,863
                              ------------   ------------  -------------  --------------  -------------  -------------  ------------

Balance, December 31, 1996          1,000        155,785     30,000,000    (17,477,623)     15,402,608    (3,440,000)    24,641,770

    Distributions to limited
       partners ($0.090 per
       limited partner unit)           --             --             --     (2,700,000)             --             --   (2,700,000)
    Net income                         --         24,300             --              --      2,581,708             --     2,606,008
                              ------------   ------------  -------------  --------------  -------------  -------------  ------------

Balance, December 31, 1997          1,000        180,085     30,000,000    (20,177,623)     17,984,316     (3,440,000 )  24,547,778

    Distributions to limited
       partners ($0.090 per
       limited partner unit)           --             --             --      (2,700,000 )           --             --    (2,700,000)
    Net income                         --         24,659             --              --      2,441,359             --     2,466,018
                              ------------   ------------  -------------  --------------  -------------  -------------  ------------

Balance, December 31, 1998    $     1,000    $   204,744   $ 30,000,000   $ (22,877,623 ) $ 20,425,675   $ (3,440,000 ) $24,313,796
                              ============   ============  =============  ==============  =============  =============  ============

</TABLE>




                 See accompanying notes to financial statements.


<PAGE>


                            CNL INCOME FUND VII, LTD.
                         (A Florida Limited Partnership)

                            STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                                   Year Ended December 31,
                                                                       1998                 1997                1996
                                                                  ----------------      ---------------     ----------------
<S> <C>
Increase (Decrease) in Cash and Cash Equivalents:

   Cash Flows from Operating Activities:
      Cash received from tenants                                     $  2,435,937        $  2,500,189          $  2,549,406
      Distributions from unconsolidated joint ventures                    376,557             300,696               191,174
      Cash paid for expenses                                             (187,925 )          (140,819  )           (248,523 )
      Interest received                                                   166,406             180,393               178,812
                                                                  ----------------      ---------------     ----------------
         Net cash provided by operating activities                      2,790,975           2,840,459             2,670,869
                                                                  ----------------      ---------------     ----------------

   Cash Flows from Investing Activities:
      Additions to land and buildings on operating leases                      --                  --            (1,041,555 )
      Proceeds from sale of land and buildings                                 --             976,334             1,661,943
      Investment in joint ventures                                             --          (1,650,905  )                 --
      Collections on mortgage notes receivable                             10,811               9,766                 8,821
      Other                                                                13,221                  --                    --
                                                                  ----------------      ---------------     ----------------
         Net cash provided by (used in) investing
             activities                                                    24,032            (664,805  )            629,209
                                                                  ----------------      ---------------     ----------------

   Cash Flows from Financing Activities:
      Distributions to limited partners                                (2,700,000 )        (2,700,000  )         (2,700,000 )
      Distributions to holder of minority interest                        (19,499 )           (19,766  )            (19,723 )
                                                                  ----------------      ---------------     ----------------
         Net cash used in financing activities                         (2,719,499 )        (2,719,766  )         (2,719,723 )
                                                                  ----------------      ---------------     ----------------

Net Increase (Decrease) in Cash and Cash Equivalents                       95,508            (544,112  )            580,355

Cash and Cash Equivalents at Beginning of Year                            761,317           1,305,429               725,074
                                                                  ----------------      ---------------     ----------------

Cash and Cash Equivalents at End of Year                              $   856,825         $   761,317          $  1,305,429
                                                                  ================      ===============     ================



</TABLE>

                 See accompanying notes to financial statements.


<PAGE>


                            CNL INCOME FUND VII, LTD.
                         (A Florida Limited Partnership)

                      STATEMENTS OF CASH FLOWS - CONTINUED
<TABLE>
<CAPTION>

                                                                               Year Ended December 31,

                                                                    1998                 1997               1996
                                                               ---------------      ---------------    ----------------
<S> <C>
Reconciliation of Net Income to Net Cash Provided by
   Operating Activities:

      Net income                                                  $  2,466,018        $  2,606,008        $  2,326,863
                                                               ---------------      ---------------    ----------------
      Adjustments to  reconcile  net income
         to net cash  provided  by  operating
         activities:
             Depreciation                                              304,356             304,356             317,957
             Minority interest in income of consolidated
                joint venture                                           18,590              18,663              18,691
             Loss (gain) on sale of land and buildings                  (1,025)           (164,888 )            39,790
             Equity in earnings of unconsolidated joint
                ventures, net of distributions                          65,476              33,445              33,920
             Decrease (increase) in receivables                        (27,330)             17,173             (14,827 )
             Decrease (increase) in prepaid expenses                       639                (101 )               379
             Decrease in net investment in direct
                financing leases                                        81,760              76,941              70,329
             Increase in accrued rental income                         (90,896)           (102,142 )          (104,639 )
             Increase (decrease) in accounts
                payable and accrued expenses                            (5,197)              3,222             (40,072 )
             Increase (decrease) in due to related parties              (9,772)             25,816              (4,244 )
             Increase (decrease) in rents  paid  in
                advance and deposits                                   (11,644)             21,966              26,722
                                                               ---------------      ---------------    ----------------
                   Total adjustments                                   324,957             234,451             344,006
                                                               ---------------      ---------------    ----------------

Net Cash Provided by Operating Activities                         $  2,790,975        $  2,840,459        $  2,670,869
                                                               ===============      ===============    ================

Supplemental Schedule of Non-Cash
      Investing and Financing Activities:

Distributions declared and unpaid at
      December 31                                                    $ 675,000           $ 675,000           $ 675,000
                                                               ===============      ===============     ===============
</TABLE>

                 See accompanying notes to financial statements.


<PAGE>


                            CNL INCOME FUND VII, LTD.
                         (A Florida Limited Partnership)

                          NOTES TO FINANCIAL STATEMENTS

                  Years Ended December 31, 1998, 1997, and 1996


1.       Significant Accounting Policies:

         Organization  and Nature of Business - CNL Income Fund VII,  Ltd.  (the
         "Partnership") is a Florida limited  partnership that was organized for
         the purpose of acquiring both newly constructed and existing restaurant
         properties,  as well as properties  upon which  restaurants  were to be
         constructed,  which are leased  primarily  to operators of national and
         regional fast-food and family-style restaurant chains.

         The general partners of the Partnership are CNL Realty Corporation (the
         "Corporate  General  Partner"),  James M.  Seneff,  Jr.  and  Robert A.
         Bourne.  Mr. Seneff and Mr. Bourne are also 50 percent  shareholders of
         the Corporate General Partner. The general partners have responsibility
         for managing the day-to-day operations of the Partnership.

         Real  Estate  and  Lease  Accounting  -  The  Partnership  records  the
         acquisition of land and buildings at cost,  including  acquisition  and
         closing costs. Land and buildings are leased to unrelated third parties
         on a triple-net basis, whereby the tenant is generally  responsible for
         all operating  expenses  relating to the property,  including  property
         taxes, insurance, maintenance and repairs. The leases are accounted for
         using  either the  direct  financing  or the  operating  methods.  Such
         methods are described below:

                  Direct  financing  method - The leases accounted for using the
                  direct  financing  method are recorded at their net investment
                  (which at the inception of the lease generally  represents the
                  cost of the asset) (Note 4).  Unearned  income is deferred and
                  amortized  to income  over the lease  terms so as to produce a
                  constant  periodic  rate of  return on the  Partnership's  net
                  investment in the leases.

                  Operating  method - Land and  building  leases  accounted  for
                  using the  operating  method are recorded at cost,  revenue is
                  recognized as rentals are earned and  depreciation  is charged
                  to operations as incurred.  Buildings are  depreciated  on the
                  straight-line  method over their estimated  useful lives of 30
                  years.  When  scheduled  rentals  vary  during the lease term,
                  income is recognized on a straight-line basis so as to produce
                  a constant periodic rent over the lease term commencing on the
                  date the property is placed in service.



<PAGE>


                            CNL INCOME FUND VII, LTD.
                         (A Florida Limited Partnership)

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                  Years Ended December 31, 1998, 1997, and 1996

1.       Significant Accounting Policies - Continued:

                  Accrued  rental  income  represents  the  aggregate  amount of
                  income  recognized  on a  straight-line  basis  in  excess  of
                  scheduled rental payments to date.  Whenever a tenant defaults
                  under  the  terms  of its  lease,  or  events  or  changes  in
                  circumstance  indicate  that the  tenant  will not  lease  the
                  property  through the end of the lease term,  the  Partnership
                  either  reserves or writes-off the  cumulative  accrued rental
                  income balance.

         When  the  properties  are  sold,  the  related  cost  and  accumulated
         depreciation  for operating  leases and the net  investment  for direct
         financing leases,  plus any accrued rental income, are removed from the
         accounts and gains or losses from sales are  reflected  in income.  The
         general  partners of the Partnership  review  properties for impairment
         whenever events or changes in circumstances  indicate that the carrying
         amount of the assets may not be  recoverable  through  operations.  The
         general partners  determine whether an impairment in value has occurred
         by comparing the estimated future  undiscounted  cash flows,  including
         the  residual  value of the  property,  with the  carrying  cost of the
         individual  property.  If an impairment  is  indicated,  the assets are
         adjusted to their fair value.  Although the general  partners have made
         their best estimate of these factors based on current conditions, it is
         reasonably  possible  that  changes  could occur in the near term which
         could adversely affect the general partners' estimate of net cash flows
         expected to be  generated  from its  properties  and the need for asset
         impairment write-downs.

         When the  collection  of amounts  recorded as rental or other income is
         considered  to be  doubtful,  an  adjustment  is made to  increase  the
         allowance for doubtful accounts,  which is netted against  receivables,
         and to decrease rental or other income or increase bad debt expense for
         the  current  period,  although  the  Partnership  continues  to pursue
         collection of such amounts.  If amounts are subsequently  determined to
         be  uncollectible,  the  corresponding  receivable  and  allowance  for
         doubtful accounts are decreased accordingly.

         Investment in Joint Ventures - The  Partnership  accounts for its 83.3%
         interest  in San Antonio  #849 Joint  Venture  using the  consolidation
         method.   Minority  interest  represents  the  minority  joint  venture
         partner's  proportionate  share  of the  equity  in  the  Partnership's
         consolidated joint venture. All significant  intercompany  accounts and
         transactions have been eliminated.

         The  Partnership's  investments in Halls Joint Venture,  CNL Restaurant
         Investments II, Des Moines Real Estate Joint Venture, and CNL Mansfield
         Joint Venture,  and a property in  Smithfield,  North  Carolina,  and a
         property in Miami,  Florida,  for which each of the two  properties  is
         held as tenants-in-common with affiliates,  are accounted for using the
         equity  method since the  Partnership  shares  control with  affiliates
         which have the same general partners.


<PAGE>


                            CNL INCOME FUND VII, LTD.
                         (A Florida Limited Partnership)

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                  Years Ended December 31, 1998, 1997, and 1996


1.       Significant Accounting Policies - Continued:

         Cash and Cash Equivalents - The Partnership considers all highly liquid
         investments  with a maturity of three months or less when  purchased to
         be cash  equivalents.  Cash  and cash  equivalents  consist  of  demand
         deposits at commercial  banks and money market funds (some of which are
         backed by government  securities).  Cash equivalents are stated at cost
         plus accrued interest, which approximates market value.

         Cash  accounts  maintained  on  behalf  of the  Partnership  in  demand
         deposits  at  commercial  banks  and  money  market  funds  may  exceed
         federally insured levels;  however, the Partnership has not experienced
         any losses in such  accounts.  The  Partnership  limits  investment  of
         temporary cash investments to financial  institutions  with high credit
         standing;  therefore, the Partnership believes it is not exposed to any
         significant credit risk on cash and cash equivalents.

         Income Taxes - Under  Section 701 of the  Internal  Revenue  Code,  all
         income,  expenses and tax credit items flow through to the partners for
         tax  purposes.  Therefore,  no  provision  for federal  income taxes is
         provided in the accompanying  financial statements.  The Partnership is
         subject to certain state taxes on its income and property.

         Additionally,  for tax  purposes,  syndication  costs are  included  in
         Partnership equity and in the basis of each partner's  investment.  For
         financial  reporting  purposes,  syndication  costs are netted  against
         partners' capital and represent a reduction of Partnership equity and a
         reduction in the basis of each partner's investment.

         Reclassification   -  Certain  items  in  the  prior  years'  financial
         statements  have been  reclassified  to conform  to 1998  presentation.
         These  reclassifications  had no effect  on  partners'  capital  or net
         income.

         Use of Estimates - The general  partners of the Partnership have made a
         number of estimates and assumptions relating to the reporting of assets
         and liabilities and the disclosure of contingent assets and liabilities
         to prepare these  financial  statements in  conformity  with  generally
         accepted  accounting  principles.  The more significant areas requiring
         the use of  management  estimates  relate to the allowance for doubtful
         accounts and future cash flows associated with long-lived  assets.  The
         more significant areas requiring the use of management estimates relate
         to the allowance for doubtful accounts and future cash flows associated
         with  long-lived  assets.   Actual  results  could  differ  from  those
         estimates.



<PAGE>


                            CNL INCOME FUND VII, LTD.
                         (A Florida Limited Partnership)

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                  Years Ended December 31, 1998, 1997, and 1996


2.       Leases:

         The  Partnership  leases its land or land and  buildings  primarily  to
         operators  of  national  and  regional   fast-food   and   family-style
         restaurants.  The  leases are  accounted  for under the  provisions  of
         Statement of Financial  Accounting  Standards No. 13,  "Accounting  for
         Leases." The leases  generally  are  classified  as  operating  leases;
         however,  some leases have been classified as direct financing  leases.
         For the leases  classified  as direct  financing  leases,  the building
         portions of the property  leases are accounted for as direct  financing
         leases  while the land  portions of the  majority  of these  leases are
         operating  leases.  Substantially all leases are for 15 to 20 years and
         provide for minimum and  contingent  rentals.  In addition,  the tenant
         generally pays all property taxes and assessments,  fully maintains the
         interior and exterior of the  building and carries  insurance  coverage
         for public liability,  property damage, fire and extended coverage. The
         lease  options  generally  allow tenants to renew the leases for two to
         four  successive  five-year  periods  subject  to the  same  terms  and
         conditions as the initial  lease.  Most leases also allow the tenant to
         purchase the property at fair market value after a specified portion of
         the lease has elapsed.

3.       Land and Buildings on Operating Leases:

         Land and  buildings on operating  leases  consisted of the following at
         December 31:
<TABLE>
<CAPTION>

                                                                    1998                  1997
                                                              -----------------     -----------------
<S> <C>
                  Land                                              $8,430,465            $8,430,465
                  Buildings                                          9,121,968             9,121,968
                                                              -----------------     -----------------
                                                                    17,552,433            17,552,433

                  Less accumulated depreciation                     (2,473,926 )          (2,169,570 )
                                                              -----------------     -----------------

                                                                   $15,078,507           $15,382,863
                                                              =================     =================
</TABLE>

         In May 1997, the  Partnership  sold its property in Columbus,  Indiana,
         for $240,000 and received net sales proceeds of $223,589,  resulting in
         a loss of $19,739 for financial reporting purposes.

         Some leases provide for escalating  guaranteed minimum rents throughout
         the  lease  terms.  Income  from  these  scheduled  rent  increases  is
         recognized on a straight-line  basis over the terms of the leases.  For
         the years ended  December 31, 1998,  1997,  and 1996,  the  Partnership
         recognized $90,896, $102,142 (net of $11,159 in reserves), and $104,639
         (net of $1,631 in reserves), respectively, of such rental income.


<PAGE>


                            CNL INCOME FUND VII, LTD.
                         (A Florida Limited Partnership)

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                  Years Ended December 31, 1998, 1997, and 1996


3.       Land and Buildings on Operating Leases - Continued:

         The following is a schedule of the future  minimum lease payments to be
         received on noncancellable operating leases at December 31, 1998:

                1999                        $1,891,776
                2000                         1,925,741
                2001                         2,022,708
                2002                         2,034,710
                2003                         1,940,473
                Thereafter                  10,605,505
                                      -----------------

                                           $20,420,913
                                      =================

         Since  lease  renewal  periods  are  exercisable  at the  option of the
         tenant, the above table only presents future minimum lease payments due
         during  the  initial  lease  terms.  In  addition,  this table does not
         include any amounts for future contingent rentals which may be received
         on the leases based on a percentage of the tenant's gross sales.

4.       Net Investment in Direct Financing Leases:

         The  following  lists the  components  of the net  investment in direct
         financing leases at December 31:
<TABLE>
<CAPTION>

                                                                                      1998                 1997
                                                                                 ----------------     ----------------
<S> <C>
                Minimum lease payments receivable                                     $5,915,553           $6,411,161
                Estimated residual values                                              1,008,935            1,008,935
                Less unearned income                                                  (3,559,096 )         (3,972,944 )
                                                                                 ----------------     ----------------

                Net investment in direct financing leases                             $3,365,392           $3,447,152
                                                                                 ================     ================

</TABLE>


<PAGE>


                            CNL INCOME FUND VII, LTD.
                         (A Florida Limited Partnership)

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                  Years Ended December 31, 1998, 1997, and 1996


4.       Net Investment in Direct Financing Leases - Continued:

         The  following  is a schedule of future  minimum  lease  payments to be
         received on direct financing leases at December 31, 1998:

                1999                           $ 495,609
                2000                             495,609
                2001                             496,766
                2002                             496,766
                2003                             496,766
                Thereafter                     3,434,037
                                        -----------------

                                              $5,915,553
                                        =================

         In October  1997,  the  Partnership  sold its  property  in  Dunnellon,
         Florida,  for $800,000 and received net sales  proceeds  (net of $5,055
         which represents  amounts due to the former tenant for prepaid rent) of
         $752,745,  resulting  in a gain of  $183,701  for  financial  reporting
         purposes.  This property was originally  acquired by the Partnership in
         August  1990  and  had a  cost  of  approximately  $546,300,  excluding
         acquisition fees and miscellaneous acquisition expenses; therefore, the
         Partnership sold the property for  approximately  $211,500 in excess of
         its original purchase price.

         The above table does not include  future  minimum  lease  payments  for
         renewal  periods or for contingent  rental payments that may become due
         in future periods (see Note 3).

5.       Investment in Joint Ventures:

         The  Partnership  has a 51.1%  interest,  an 18 percent  interest and a
         4.79%  interest in the profits and losses of Halls Joint  Venture,  CNL
         Restaurant  Investments  II, and Des Moines Real Estate Joint  Venture,
         respectively.  The remaining interests in these joint ventures are held
         by affiliates of the Partnership which have the same general partners.

         In  February  1997,  the  Partnership  entered  into  a  joint  venture
         arrangement,  CNL  Mansfield  Joint  Venture,  with an affiliate of the
         Partnership which has the same general partners, to hold one restaurant
         property in Mansfield,  Texas. As of December 31, 1998, the Partnership
         owned a 79 percent interest, respectively, in the profits and losses of
         the joint venture.  The Partnership accounts for its investment in this
         joint  venture  under the equity  method since the  Partnership  shares
         control with the affiliate.


<PAGE>


                            CNL INCOME FUND VII, LTD.
                         (A Florida Limited Partnership)

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                  Years Ended December 31, 1998, 1997, and 1996


5.       Investment in Joint Ventures - Continued:

         As of January 1,  1997,  the  Partnership  had a 48.33%  interest  in a
         property in Yuma,  Arizona,  with an affiliate of the Partnership  that
         has the same general partners, as  tenants-in-common.  In October 1997,
         the  Partnership  and the  affiliate,  as  tenants-in-common,  sold the
         property in Yuma,  Arizona,  for a total sales price of $1,010,000  and
         received  net  sales  proceeds  of  $982,025  resulting  in a  gain  of
         approximately  $128,400 for financial reporting purposes.  The property
         was  originally  acquired  in  July  1994  and  had  a  total  cost  of
         approximately  $861,700,  excluding  acquisition fees and miscellaneous
         acquisition   expenses;   therefore,   the   property   was   sold  for
         approximately  $120,300 in excess of its original  purchase  price.  In
         December 1997, the Partnership  reinvested its portion of the net sales
         proceeds from the sale of the Yuma, Arizona, property, along with funds
         from the sale of a  wholly-owned  Property in Columbus,  Indiana,  in a
         property in Miami, Florida, as tenants-in-common with affiliates of the
         general  partners.  The Partnership  accounts for its investment in the
         property  in  Miami,  Florida,   using  the  equity  method  since  the
         Partnership shares control with affiliates, and amounts relating to its
         investment are included in investment in joint ventures. As of December
         31, 1998, the Partnership owned a 35.64% interest in the Miami, Florida
         property owned with affiliates as tenants-in-common.

         In December  1997, the  Partnership  acquired a property in Smithfield,
         North  Carolina as  tenants-in-common  with an affiliate of the general
         partners.  The Partnership accounts for its investment in this property
         using the equity method since the  Partnership  shares  control with an
         affiliate,  and amounts  relating  to its  investment  are  included in
         investment in joint ventures.  As of December 31, 1998, the Partnership
         owned a 53 percent interest in this property.

         CNL  Restaurant  Investments  II owns and leases six  properties  to an
         operator of national fast-food or family-style  restaurants,  and Halls
         Joint  Venture,  Des Moines Real Estate Joint  Venture,  CNL  Mansfield
         Joint Venture,  and the Partnership and affiliates as tenants-in-common
         in two separate tenancy-in-common arrangements, each own and lease one


<PAGE>


                            CNL INCOME FUND VII, LTD.
                         (A Florida Limited Partnership)

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                  Years Ended December 31, 1998, 1997, and 1996


5.       Investment in Joint Ventures - Continued:

         property  to  an  operator  of  national   fast-food  or   family-style
         restaurants.  The following presents the combined,  condensed financial
         information  for the  joint  ventures  and the two  properties  held as
         tenants-in-common with affiliates at December 31:
<TABLE>
<CAPTION>

                                                                              1998                  1997
                                                                         ----------------      ----------------
<S> <C>
                Land and buildings on operating
                    leases, less accumulated
                    depreciation                                             $10,612,379           $10,892,405
                Cash                                                               3,763                   750
                Receivables                                                       21,249                18,819
                Accrued rental income                                            178,775               147,685
                Other assets                                                       1,116                 1,079
                Liabilities                                                        8,916                 8,625
                Partners' capital                                             10,808,366            11,052,113
                Revenues                                                       1,324,602             1,012,624
                Gain on sale of land and building                                     --               128,371
                Net income                                                     1,028,391               905,117
</TABLE>

         The Partnership  recognized income totalling  $311,081,  $267,251,  and
         $157,254  for the  years  ended  December  31,  1998,  1997,  and 1996,
         respectively,  from these joint ventures and the two properties held as
         tenants-in-common with affiliates.

6.       Mortgage Notes Receivable:

         In connection with the sale of its property in Florence, South Carolina
         during  1995,  the  Partnership  accepted  a  promissory  note  in  the
         principal  sum  of  $1,160,000,  collateralized  by a  mortgage  on the
         property.  The  promissory  note bears interest at a rate of 10.25% per
         annum  and is being  collected  in 59  equal  monthly  installments  of
         $10,395, with a balloon payment of $1,105,715 due in July 2000.

         In  addition,  the  Partnership  accepted  a  promissory  note  in  the
         principal sum of $240,000 in  connection  with the sale of its property
         in Jacksonville,  Florida in December 1995. The note is  collateralized
         by a mortgage on the property.  The promissory note bears interest at a
         rate of ten  percent  per  annum  and is being  collected  in 119 equal
         monthly  installments of $2,106, with a balloon payment of $218,252 due
         in December 2005.



<PAGE>


                            CNL INCOME FUND VII, LTD.
                         (A Florida Limited Partnership)

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                  Years Ended December 31, 1998, 1997, and 1996


6.       Mortgage Notes Receivable - Continued:

         The mortgage  notes  receivable  consisted of the following at December
         31:
<TABLE>
<CAPTION>

                                                                               1998                 1997
                                                                          ----------------     ---------------
<S> <C>
                 Principal balance                                             $1,357,877          $1,368,688
                 Accrued interest receivable                                        8,457               8,212
                 Less deferred gain on sale of land
                     and building                                                (125,278 )          (126,303 )
                                                                          ----------------     ---------------

                                                                               $1,241,056          $1,250,597
                                                                          ================     ===============
</TABLE>

         The general partners believe that the estimated fair values of mortgage
         notes  receivable  at  December  31,  1998 and  1997,  approximate  the
         outstanding  principal amount based on estimated current rates at which
         similar  loans would be made to borrowers  with similar  credit and for
         similar maturities.

7.       Allocations and Distributions:

         Generally, all net income and net losses of the Partnership,  excluding
         gains and losses from the sale of properties,  are allocated 99 percent
         to the  limited  partners  and one  percent  to the  general  partners.
         Distributions  of net  cash  flow are made 99  percent  to the  limited
         partners and one percent to the general  partners;  provided,  however,
         that the one percent of net cash flow to be  distributed to the general
         partners  is  subordinated  to receipt by the  limited  partners  of an
         aggregate,  ten percent,  cumulative,  noncompounded  annual  return on
         their adjusted capital contributions (the "10% Preferred Return").

         Generally,  net  sales  proceeds  from  the sale of  properties  not in
         liquidation  of the  Partnership,  to the extent  distributed,  will be
         distributed  first to the limited  partners in an amount  sufficient to
         provide them with their 10% Preferred Return,  plus the return of their
         adjusted capital contributions. The general partners will then receive,
         to  the  extent  previously  subordinated  and  unpaid,  a one  percent
         interest  in all prior  distributions  of net cash flow and a return of
         their  capital  contributions.  Any  remaining  sales  proceeds will be
         distributed 95 percent to the limited  partners and five percent to the
         general  partners.  Any  gain  from  the  sale  of a  property  not  in
         liquidation of the  Partnership  is, in general,  allocated in the same
         manner as net sales proceeds are distributable.  Any loss from the sale
         of a property not in  liquidation  of the  Partnership  is, in general,
         allocated  first,  on a pro  rata  basis,  to  partners  with  positive
         balances in their capital accounts;  and thereafter,  95 percent to the
         limited partners and five percent to the general partners.


<PAGE>


                            CNL INCOME FUND VII, LTD.
                         (A Florida Limited Partnership)

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                  Years Ended December 31, 1998, 1997, and 1996


7.       Allocations and Distributions - Continued:

         Generally,  net sales  proceeds from a liquidating  sale of properties,
         will be used in the following  order: i) first to pay and discharge all
         of the Partnership's liabilities to creditors, ii) second, to establish
         reserves that may be deemed necessary for any anticipated or unforeseen
         liabilities or obligations of the  Partnership,  iii) third, to pay all
         of the  Partnership's  liabilities,  if any, to the general and limited
         partners,  iv) fourth,  after  allocations of net income,  gains and/or
         losses,  to distribute to the partners with positive  capital  accounts
         balances,  in proportion to such balances,  up to amounts sufficient to
         reduce such positive  balances to zero,  and v)  thereafter,  any funds
         remaining shall then be distributed 95 percent to the limited  partners
         and five percent to the general partners.

         During each of the years ended  December 31, 1998,  1997, and 1996, the
         Partnership   declared   distributions   to  the  limited  partners  of
         $2,700,000.  No distributions have been made to the general partners to
         date.



<PAGE>


                            CNL INCOME FUND VII, LTD.
                         (A Florida Limited Partnership)

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                  Years Ended December 31, 1998, 1997 and 1996


8.       Income Taxes:

         The following is a reconciliation of net income for financial reporting
         purposes to net income for federal  income tax  purposes  for the years
         ended December 31:
<TABLE>
<CAPTION>

                                                                     1998               1997              1996
                                                                 --------------     -------------     --------------
<S> <C>
              Net income for financial reporting purposes           $2,466,018        $2,606,008         $2,326,863

              Depreciation for tax reporting purposes in excess
                  of depreciation for financial reporting purposes     (16,795 )         (25,552 )          (24,753 )

              Gain on sale of land and buildings for financial
                  reporting purposes in excess of gain for tax
                  reporting purposes                                      (246 )        (178,348 )         (163,152 )

              Direct financing leases recorded as operating
                  leases for tax reporting purposes                     81,760            76,941             70,329

              Equity in earnings of unconsolidated joint
                  ventures for tax reporting purposes in excess
                  of (less than) equity in earnings of
                  unconsolidated joint ventures for
                  financial reporting purposes                          11,026           (55,911 )            1,420

              Accrued rental income                                    (90,896 )        (102,142 )         (104,639 )

              Rents paid in advance                                    (12,644 )          21,966             26,722

              Minority interest in timing differences of
                  unconsolidated joint venture                             982               981                981

              Allowance for uncollectible accounts                      (4,106 )              --                 --

              Capitalization of transaction costs for tax
                  reporting purposes                                    18,781                --                 --

              Other                                                         --           (10,275 )               --
                                                                 --------------     -------------     --------------

              Net income for federal income tax purposes            $2,453,880        $2,333,668         $2,133,771
                                                                 ==============     =============     ==============


</TABLE>


<PAGE>


                            CNL INCOME FUND VII, LTD.
                         (A Florida Limited Partnership)

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                  Years Ended December 31, 1998, 1997, and 1996


9.       Related Party Transactions:

         One of the individual general partners, James M. Seneff, Jr., is one of
         the principal shareholders of CNL Group, Inc., the majority stockholder
         of CNL Fund Advisors, Inc. The other individual general partner, Robert
         A. Bourne, serves as treasurer, director and vice chairman of the board
         of CNL Fund Advisors.  During the years ended December 31, 1998,  1997,
         and 1996,  CNL Fund  Advisors,  Inc.  (hereinafter  referred  to as the
         "Affiliate")  performed  certain  services  for  the  Partnership,   as
         described below.

         During the years ended December 31, 1998, 1997, and 1996, the Affiliate
         acted  as  manager  of  the  Partnership's  properties  pursuant  to  a
         management agreement with the Partnership. In connection therewith, the
         Partnership  agreed  to pay the  Affiliate  an  annual,  noncumulative,
         subordinated management fee of one percent of the sum of gross revenues
         from properties  wholly owned by the Partnership and the  Partnership's
         allocable   share  of  gross  revenues  from  joint  ventures  and  the
         properties held as tenants-in-common with affiliates, but not in excess
         of  competitive  fees  for  comparable  services.  These  fees  will be
         incurred  and will be payable only after the limited  partners  receive
         their  10%  Preferred  Return.  Due to the  fact  that  these  fees are
         noncumulative,  if the limited  partners  have not  received  their 10%
         Preferred  Return in any particular year, no management fee will be due
         or payable for such year. As a result of such threshold,  no management
         fees were incurred during the years ended December 31, 1998,  1997, and
         1996.

         The Affiliate is also entitled to receive a deferred, subordinated real
         estate disposition fee, payable upon the sale of one or more properties
         based on the lesser of one-half of a competitive real estate commission
         or three  percent  of the  sales  price  if the  Affiliate  provides  a
         substantial amount of services in connection with the sale. However, if
         the net sales  proceeds are  reinvested in a replacement  property,  no
         such  real  estate   disposition  fees  will  be  incurred  until  such
         replacement   property  is  sold  and  the  net  sales   proceeds   are
         distributed.  The  payment  of  the  real  estate  disposition  fee  is
         subordinated to receipt by the limited  partners of their aggregate 10%
         Preferred  Return,  plus  their  adjusted  capital  contributions.   No
         deferred,  subordinated real estate  disposition fees were incurred for
         the years ended December 31, 1998, 1997, and 1996.




<PAGE>


                            CNL INCOME FUND VII, LTD.
                         (A Florida Limited Partnership)

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                  Years Ended December 31, 1998, 1997, and 1996

9.       Related Party Transactions - Continued:

         During the years ended December 31, 1998, 1997, and 1996, the Affiliate
         provided accounting and administrative services to the Partnership on a
         day-to-day basis. The Partnership incurred $87,256, $77,078, and 92,985
         for the years ended December 31, 1998,  1997,  and 1996,  respectively,
         for such services.

         The due to related parties consisted of the following at December 31:
<TABLE>
<CAPTION>

                                                                                    1998                 1997
                                                                               ---------------       --------------
<S> <C>
          Due to Affiliates:
              Expenditures incurred on behalf of the
                 Partnership                                                          $10,111              $20,321
              Accounting and administrative services                                    7,800                7,362
              Deferred, subordinated real estate disposition fee                        7,200                7,200
                                                                               ---------------       --------------

                                                                                      $25,111              $34,883
                                                                               ===============       ==============
</TABLE>

10.      Concentration of Credit Risk:

         The  following  schedule  presents  total rental and earned income from
         individual  lessees,  each  representing  more than ten  percent of the
         Partnership's   total   rental  and  earned   income   (including   the
         Partnership's  share  of  total  rental  and  earned  income  from  the
         unconsolidated   joint  ventures  and  the  two   properties   held  as
         tenants-in-common  with  affiliates),  for  each  of  the  years  ended
         December 31:
<TABLE>
<CAPTION>

                                                                1998              1997               1996
                                                            -------------     -------------      -------------
<S> <C>
                  Golden Corral Corporation                     $732,650          $625,724           $608,852
                  Restaurant Management
                      Services, Inc.                             448,691           444,069            446,867
                  Waving Leaves, Inc.                            300,546               N/A                  --
                  Flagstar Enterprises, Inc.                         N/A           307,738            464,042


</TABLE>

<PAGE>


                            CNL INCOME FUND VII, LTD.
                         (A Florida Limited Partnership)

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                  Years Ended December 31, 1998, 1997, and 1996


10.      Concentration of Credit Risk - Continued:

         In addition,  the following  schedule  presents total rental and earned
         income from individual  restaurant chains,  each representing more than
         ten  percent  of the  Partnership's  total  rental  and  earned  income
         (including  the  Partnership's  share of total rental and earned income
         from the  unconsolidated  joint ventures and the two properties held as
         tenants-in-common with affiliates) for each of the years ended December
         31:
<TABLE>
<CAPTION>

                                                              1998               1997               1996
                                                          --------------     -------------      -------------
<S> <C>
          Golden Corral Family
              Steakhouse Restaurants                           $732,650          $625,724           $608,852
          Burger King                                           469,984           466,626            478,901
          Hardees                                               451,348           447,074            524,625
</TABLE>

         The  information   denoted  by  N/A  indicates  that  for  each  period
         presented,  the tenant and the chains did not  represent  more than ten
         percent of the Partnership's total rental and earned income.

         Although  the  Partnership's   properties  are  geographically  diverse
         throughout the United States and the  Partnership's  lessees  operate a
         variety of restaurant concepts,  default by any one of these lessees or
         restaurant chains could significantly  impact the results of operations
         of the  Partnership  if the  Partnership  is not able to  re-lease  the
         properties in a timely manner.

11.      Subsequent Event:

         On March 11, 1999, the  Partnership  entered into an Agreement and Plan
         of Merger with CNL American Properties Fund, Inc. ("APF"),  pursuant to
         which the Partnership would be merged with and into a subsidiary of APF
         (the  "Merger").  As  consideration  for the Merger,  APF has agreed to
         issue 3,202,371  shares of its common stock, par value $0.01 per shares
         (the "APF  Shares")  which,  for the  purposes  of  valuing  the merger
         consideration,  have been  valued by APF at $10.00 per APF  Share,  the
         price paid by APF  investors in APF's most recent public  offering.  In
         order to assist the general  partners in evaluating the proposed merger
         consideration,  the general partners retained Valuation  Associates,  a
         nationally  recognized  real estate  appraisal  firm,  to appraise  the
         Partnership's   restaurant  property  portfolio.   Based  on  Valuation
         Associates'  appraisal,  the Partnership's property portfolio and other
         assets were valued on a going  concern basis  (meaning the  Partnership
         continues unchanged) at $31,543,529 as of December 31, 1998. Legg Mason
         Wood Walker,  Incorporated has rendered a fairness opinion that the APF
         Share


<PAGE>


                            CNL INCOME FUND VII, LTD.
                         (A Florida Limited Partnership)

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                  Years Ended December 31, 1998, 1997, and 1996


11.      Subsequent Event - Continued:

         consideration,  payable  by  APF,  is fair  to the  Partnership  from a
         financial  point of view.  The APF Shares are expected to be listed for
         trading  on  the  New  York  Stock  Exchange   concurrently   with  the
         consummation of the Merger, and, therefore, would be freely tradable at
         the option of the former limited partners.  At a special meeting of the
         partners  that is  expected  to be held in the third  quarter  of 1999,
         limited  partners  holding  in  excess  of  50%  of  the  Partnership's
         outstanding limited partnership interests must approve the Merger prior
         to  consummation  of the  transaction.  The general  partners intend to
         recommend  that the  limited  partners of the  Partnership  approve the
         Merger. In connection with their  recommendation,  the general partners
         will  solicit  the  consent  of the  limited  partners  at the  special
         meeting.  If the limited  partners  reject the Merger,  the Partnership
         will  bear  the  portion  of  the  transaction  costs  based  upon  the
         percentage  of "For"  votes  and the  general  partners  will  bear the
         portion  of  such  transaction  costs  based  upon  the  percentage  of
         "Against" votes and abstentions.




<PAGE>


Item 9.   Changes in and Disagreements with Accountants on Accounting and
          Financial Disclosure

         None.


                                    PART III


Item 10.  Directors and Executive Officers of the Registrant

         The General Partners of the Registrant are James M. Seneff, Jr., Robert
A.  Bourne  and CNL  Realty  Corporation,  a Florida  corporation.  The  General
Partners  manage  and  control  the  Partnership's   affairs  and  have  general
responsibility   and  the  ultimate  authority  in  all  matters  affecting  the
Partnership's  business.  The  Partnership  has  available  to it the  services,
personnel and experience of CNL Fund Advisors,  Inc., CNL Group,  Inc. and their
affiliates, all of which are affiliates of the General Partners.

         James M. Seneff, Jr., age 52, is a principal  stockholder of CNL Group,
Inc., a diversified  real estate company,  and has served as its Chairman of the
Board of Directors,  a director and Chief Executive  Officer since its formation
in 1980. Mr. Seneff has been Chairman of the Board of Directors,  director,  and
Chief Executive Officer of CNL Securities Corp. since its formation in 1979. Mr.
Seneff also has held the position of Chairman of the Board of  Directors,  Chief
Executive  Officer,   President  and  director  of  CNL  Management  Company,  a
registered investment advisor,  since its formation in 1976, has served as Chief
Executive  Officer,  Chairman  of the Board  and a  director  of CNL  Investment
Company,  has served as Chief Executive  Officer, a director and Chairman of the
Board of Directors of Commercial Net Lease Realty, Inc., a publicly-traded REIT,
listed on the NYSE, since 1992,  served as Chief Executive  Officer,  a director
and  Chairman of the Board of Directors of CNL Realty  Advisors,  Inc.  from its
inception in May 1992 through  December  1997, at which time such company merged
with  Commercial  Net Lease  Realty,  Inc.,  and has held the  position of Chief
Executive  Officer,  Chairman of the Board and a director  of CNL  Institutional
Advisors, Inc., a registered investment advisor, since its inception in December
1990.  Mr.  Seneff  has  served as  Chairman  of the Board of  Directors  of CNL
American  Properties  Fund, Inc. since December 1994 and as a director and Chief
Executive  Officer  since May 1994.  Mr.  Seneff has served as  Chairman  of the
Board,  Chief Executive Officer and a director of CNL Fund Advisors,  Inc. since
March 1994.  Mr.  Seneff has served as Chairman  of the Board,  Chief  Executive
Officer and a director of CNL Hospitality  Properties,  Inc. since June 1996 and
of CNL Hospitality Advisors, Inc. since January 1997. Mr. Seneff has also served
as Chairman of the Board,  Chief Executive  Officer and a director of CNL Health
Care  Properties,  Inc. since  December 1997 and CNL Health Care Advisors,  Inc.
since July 1997. Mr. Seneff previously served on the Florida State Commission on
Ethics  and is a  former  member  and past  Chairman  of the  State  of  Florida
Investment  Advisory Council,  which advises the Florida Board of Administration
investments for various Florida employee  retirement funds. The Florida Board of
Administration,  Florida's  principal  investment  advisory and money management
agency,  oversees the  investment of more then $60 billion of retirement  funds.
Mr.  Seneff  has  served as a member of the board of  directors  of First  Union
National  Bank of  Florida  since  May 1998 and has  served  as a member  of the
Orlando Advisory Board of First Union National Bank of Florida since March 1994.
Since 1971,  Mr.  Seneff has been active in the  acquisition,  development,  and
management  of real  estate  projects  and,  directly  or through an  affiliated
entity,  has  served as a general  partner  or joint  venturer  in over 100 real
estate ventures involved in the financing, acquisition, construction, and rental
of restaurants,  office buildings,  apartment complexes,  hotels, and other real
estate.  Included in these real estate ventures are  approximately  65 privately
offered  real  estate  limited  partnerships  in which Mr.  Seneff,  directly or
through an affiliated  entity,  serves or has served as a general partner.  Also
included are CNL Income Fund,  Ltd.,  CNL Income Fund II, Ltd.,  CNL Income Fund
III,  Ltd.,  CNL Income Fund IV, Ltd.,  CNL Income Fund V, Ltd., CNL Income Fund
VI, Ltd., CNL Income Fund VIII,  Ltd., CNL Income Fund IX, Ltd., CNL Income Fund
X, Ltd.,  CNL Income Fund XI, Ltd.,  CNL Income Fund XII,  Ltd., CNL Income Fund
XIII, Ltd., CNL Income Fund XIV, Ltd., CNL Income Fund XV, Ltd., CNL Income Fund
XVI, Ltd., CNL Income Fund XVII, Ltd. and CNL Income Fund XVIII,  Ltd. (the "CNL
Income  Fund  Partnerships"),  public  real  estate  limited  partnerships  with
investment  objectives similar to those of the Partnership,  in which Mr. Seneff
serves as a  general  partner.  Mr.  Seneff  received  his  degree  in  Business
Administration from Florida State University in 1968.

         Robert A.  Bourne,  age 51, is  President  and  Treasurer of CNL Group,
Inc.,  President,  Treasurer,  a director,  and a  registered  principal  of CNL
Securities  Corp.,  President,  Treasurer,  and a  director  of  CNL  Investment
Company,  and  Chief  Investment  Officer,  a  director  and  Treasurer  of  CNL
Institutional Advisors, Inc., a registered investment advisor. Mr. Bourne served
as President of CNL Institutional  Advisor,  Inc. from the date of its inception
through  July 1997.  Mr.  Bourne  served as President  of  Commercial  Net Lease
Realty,  Inc.  from July 1992 through  February  1996,  served as Secretary  and
Treasurer from February 1996 through December 1997, and has served as a director
since July 1992 and as Vice  Chairman of the Board of Directors  since  February
1996. In addition,  Mr. Bourne served as President of CNL Realty Advisors,  Inc.
from May 1992 through  February  1996,  served as Treasurer  from  February 1996
through  December 1997,  served as a director from May 1992 through December 31,
1997 and served as Vice Chairman from  February 1996 through  December  1997, at
which time such company merged with Commercial Net Lease Realty, Inc. Mr. Bourne
has served as a Vice  Chairman of the Board of  Directors  and  Treasurer of CNL
American  Properties  Fund,  Inc.  since February 1999, has served as a director
since May 1994 and previously served as President from May 1994 through February
1999. Mr. Bourne has served as a director of CNL Fund Advisors, Inc. since March
1994, has served as Treasurer and Vice Chairman of the Board of Directors  since
September  1997,  and  previously  served as  President  from March 1994 through
September  1997.  Mr.  Bourne has  served as  President  and a  director  of CNL
Hospitality  Properties,  Inc. since June 1996 and of CNL Hospitality  Advisors,
Inc.  since January 1997. Mr. Bourne has served as President and director of CNL
Health Care  Properties,  Inc. since December 1997 and CNL Health Care Advisors,
Inc. since July 1997. Mr. Bourne,  who joined CNL Securities  Corp. in 1979, has
participated  as a general  partner or joint  venturer  in over 100 real  estate
ventures  involved in the financing,  acquisition,  construction,  and rental of
restaurants,  office  buildings,  apartment  complexes,  hotels,  and other real
estate.  Included in these real estate ventures are  approximately  64 privately
offered  real  estate  limited  partnerships  in which Mr.  Bourne,  directly or
through an affiliated  entity,  serves or has served as a general partner.  Also
included  are the CNL Income  Fund  Partnerships,  public  real  estate  limited
partnerships with investment objectives similar to those of the Partnership,  in
which  Mr.  Bourne  serves as a  general  partner.  Mr.  Bourne  formerly  was a
certified public  accountant with Coopers & Lybrand and a partner in the firm of
Bourne & Rose, P.A. Mr. Bourne received a B.A. in Accounting,  with honors, from
Florida State University in 1970.

         CNL Realty Corporation is a corporation organized on November 26, 1985,
under the laws of the State of Florida.  Its sole directors and shareholders are
James M. Seneff, Jr. and Robert A. Bourne, the individual General Partners.  CNL
Realty  Corporation  was organized to serve as the corporate  general partner of
real estate limited partnerships,  such as the Partnership,  organized by one or
both of the individual General Partners. CNL Realty Corporation currently serves
as the corporate general partner of the CNL Income Fund Partnerships.

         CNL  Fund  Advisors,  Inc.  provides  certain  management  services  in
connection with the Partnership and its Properties. CNL Fund Advisors, Inc. is a
corporation  organized  in 1994 under the laws of the State of Florida,  and its
principal  office is located at 400 East South Street,  Orlando,  Florida 32801.
CNL Fund  Advisors,  Inc. is a majority owned  subsidiary of CNL Group,  Inc., a
diversified  real  estate  company,   and  was  organized  to  perform  property
acquisition, property management and other services.

         CNL  Group,  Inc.,  which is the parent  company of CNL Fund  Advisors,
Inc.,  was organized in 1980 under the laws of the State of Florida.  CNL Group,
Inc. is a diversified  real estate  company which  provides a wide range of real
estate,  development  and  financial  services to companies in the United States
through the  activities  of its  subsidiaries.  These  activities  are primarily
focused  on the  franchised  restaurant  and  hospitality  industries.  James M.
Seneff,  Jr., an individual General Partner of the Partnership,  is the Chairman
of the Board,  Chief Executive  Officer,  and a director of CNL Group,  Inc. Mr.
Seneff and his wife own all of the outstanding shares of CNL Group, Inc.

         The following persons serve as operating officers of CNL Group, Inc. or
its affiliates or  subsidiaries  in the discretion of the Boards of Directors of
those companies,  but, except as specifically indicated, do not serve as members
of the Boards of Directors of those  entities.  The Boards of Directors have the
responsibility for creating and implementing the policies of CNL Group, Inc. and
its affiliated companies.

         Curtis B. McWilliams,  age 43, joined CNL Group, Inc. in April 1997 and
currently serves as an Executive Vice President. In addition, Mr. McWilliams has
served  as  President  of  CNL  Fund  Advisors,  Inc.  and as  President  of the
Restaurant  and Financial  Services  Groups within CNL Group,  Inc.  since April
1997. Mr.  McWilliams has served as President of CNL American  Properties  Fund,
Inc. since February 1999 and previously  served as Executive Vice President from
February 1998 through February 1999. From September 1983 through March 1997, Mr.
McWilliams  was employed by Merrill  Lynch & Co.,  most  recently as Chairman of
Merrill  Lynch's  Private  Advisory  Services until March 1997.  Mr.  McWilliams
received a B.S.E. in Chemical  Engineering from Princeton University in 1977 and
a Masters of Business  Administration  with a concentration  in finance from the
University of Chicago in 1983.

         John T. Walker,  age 40, has served as Executive  Vice President of CNL
American  Properties  Fund, Inc. since January 1996, as Chief Operating  Officer
since March 1995, and previously  served as Senior Vice President since December
1994. In addition, Mr. Walker has served as Executive Vice President of CNL Fund
Advisors, Inc. since January 1996, Chief Operating Officer since April 1995, and
previously  served as Senior Vice President  from November 1994 through  January
1996. In addition,  Mr. Walker  previously served as Executive Vice President of
CNL Hospitality  Properties,  Inc. and CNL Hospitality  Advisors,  Inc. From May
1992 to May 1994, Mr. Walker, a certified public accountant,  was Executive Vice
President for Finance and Administration and Chief Financial Officer of Z Music,
Inc.,   a  cable   television   network   (subsequently   acquired   by  Gaylord
Entertainment),   where  he  was   responsible   for   overall   financial   and
administrative  management  and planning.  From January 1990 through April 1992,
Mr. Walker was Chief  Financial  Officer of the First Baptist Church in Orlando,
Florida.  From  April  1984  through  December  1989,  he was a  partner  in the
accounting firm of Chastang, Ferrell & Walker, P.A., where he was the partner in
charge of audit and consulting services, and from 1981 to 1984, Mr. Walker was a
Senior  Consultant/Audit  Senior at Price Waterhouse.  Mr. Walker is a Cum Laude
graduate of Wake Forest University with a B.S. in Accountancy and is a certified
public accountant.

         Lynn E. Rose,  age 50, a  certified  public  accountant,  has served as
Secretary of CNL American  Properties  Fund, Inc. since December 1994 and served
as Treasurer from December 1994 through  February 1999. Ms. Rose has served as a
director  and  Secretary of CNL Fund  Advisors,  Inc.  since March 1994,  and as
Treasurer  from the date of its  inception  through June 30, 1997.  Ms. Rose has
served as Secretary of CNL Group, Inc. since 1987, as Chief Financial Officer of
CNL Group, Inc. since December 1993, and served as Controller of CNL Group, Inc.
from 1987  until  December  1993.  In  addition,  Ms.  Rose has  served as Chief
Financial Officer and Secretary of CNL Securities Corp. since July 1994. She has
served as Chief Operating Officer, Vice President and Secretary of CNL Corporate
Services,  Inc. since November 1994. Ms. Rose also has served as Chief Financial
Officer and Secretary of CNL Institutional Advisors, Inc. since its inception in
1990, as Treasurer of CNL Realty Advisors,  Inc. from 1991 to February 1996, and
as Secretary and a director of CNL Realty Advisors,  Inc. since its inception in
1991 until  December 31, 1997, at which time CNL Realty  Advisors,  Inc.  merged
with Commercial Net Lease Realty, Inc. In addition, Ms. Rose served as Secretary
and Treasurer of Commercial  Net Lease Realty,  Inc. from 1992 to February 1996.
Ms. Rose also serves as Secretary and Treasurer of CNL  Hospitality  Properties,
Inc. and CNL Health Care  Properties,  Inc. and as  Secretary,  Treasurer  and a
director of CNL Hospitality  Advisors,  Inc. and CNL Health Care Advisors,  Inc.
Ms. Rose also  currently  serves as Secretary  for  approximately  50 additional
corporations.  Ms.  Rose  oversees  the  legal  compliance,  accounting,  tenant
compliance,  and reporting  for over 250  corporations,  partnerships  and joint
ventures.  Prior to joining CNL, Ms. Rose was a partner with Robert A. Bourne in
the accounting firm of Bourne & Rose, P.A.,  Certified Public  Accountants.  Ms.
Rose holds a B.A. in Sociology from the University of Central Florida.

         Jeanne A. Wall,  age 40, has served as Executive  Vice President of CNL
American  Properties  Fund,  Inc.  since  December  1994. Ms. Wall has served as
Executive  Vice  President of CNL Fund  Advisors,  Inc. since November 1994, and
previously  served as Vice President from March 1994 through  November 1994. Ms.
Wall has served as Chief Operating Officer of CNL Investment  Company and of CNL
Securities  Corp. since November 1994 and has served as Executive Vice President
of CNL  Investment  Company since January 1991.  Ms. Wall joined CNL  Securities
Corp. in 1984. In 1985, Ms. Wall became Vice  President of CNL Securities  Corp.
In 1987, she became Senior Vice President and in July 1997 she became  Executive
Vice  President of CNL  Securities  Corp. In this  capacity,  Ms. Wall serves as
national  marketing and sales director and oversees the national  marketing plan
for  the CNL  investment  programs.  In  addition,  Ms.  Wall  oversees  product
development,  partnership  administration  and  investor  services  for programs
offered  through  participating  brokers and  corporate  communications  for CNL
Group,  Inc.  and its  affiliates.  Ms.  Wall also has  served  as  Senior  Vice
President of CNL Institutional Advisors,  Inc., a registered investment advisor,
from 1990 to 1993,  as Vice  President of CNL Realty  Advisors,  Inc.  since its
inception in 1991 until  December 31, 1997,  at which time CNL Realty  Advisors,
Inc. merged with Commercial Net Lease Realty, Inc., and served as Vice President
of  Commercial  Net Lease Realty,  Inc. from 1992 through  December 31, 1997. In
addition,  Ms.  Wall  serves as  Executive  Vice  President  of CNL  Hospitality
Properties,  Inc., CNL Hospitality  Advisors,  Inc., CNL Health Care Properties,
Inc.  and CNL Health  Care  Advisors,  Inc.  Ms.  Wall holds a B.A.  in Business
Administration  from  Linfield  College  and is a  registered  principal  of CNL
Securities  Corp.  Ms.  Wall  currently  serves as a trustee on the board of the
Investment Program Association and on the Direct Participation Program committee
for the National Association of Securities Dealers (NASD).

         Steven D.  Shackelford,  age 35, a  certified  public  accountant,  has
served as Chief Financial  Officer of CNL American  Properties  Fund, Inc. since
January 1997 and as Chief  Financial  Officer of CNL Fund  Advisors,  Inc. since
September  1996.  From  March 1995 to July 1996,  Mr.  Shackelford  was a senior
manager in the national office of Price  Waterhouse where he was responsible for
advising  foreign  clients  seeking to raise capital and a public listing in the
United  States.  From August  1992 to March 1995,  he served as a manager in the
Price Waterhouse, Paris, France office


<PAGE>


serving several  multinational  clients.  Mr. Shackelford was an audit staff and
audit  senior  from  1986  to 1992  in the  Orlando,  Florida  office  of  Price
Waterhouse.  Mr. Shackelford  received a B.A. in Accounting,  with honors, and a
Masters of Business Administration from Florida State University.


Item 11.  Executive Compensation

         Other than as  described in Item 13, the  Partnership  has not paid and
does not intend to pay any executive compensation to the General Partners or any
of their affiliates.  There are no compensatory plans or arrangements  regarding
termination of employment or change of control.


Item 12.  Security Ownership of Certain Beneficial Owners and Management

         As of March 11,  1999,  no person was known to the  Registrant  to be a
beneficial owner of more than five percent of the Units.

         The following  table sets forth,  as of March 11, 1999,  the beneficial
ownership interests of the General Partners in the Registrant.

<TABLE>
<CAPTION>

                  Title of Class                 Name of Partner                     Percent of Class
<S> <C>
         General Partnership Interests           James M. Seneff, Jr.                       45%
                                                 Robert A. Bourne                           45%
                                                 CNL Realty Corporation                     10%
                                                                                          -----
                                                                                           100%
</TABLE>


         Neither the General  Partners,  nor any of their  affiliates,  owns any
interest  in the  Registrant,  except as noted  above.  On March 11,  1999,  the
Registrant  entered  into an  Agreement  and Plan of  Merger  with CNL  American
Properties  Fund, Inc.  ("APF") pursuant to which the Registrant would be merged
with and into a subsidiary of APF (the "Merger").  For further  discussion,  see
Item 8. Financial Statements and Supplementary Data -- Note 11.
Subsequent Event.




<PAGE>


Item 13.  Certain Relationships and Related Transactions

         The  table  below   summarizes  the  types,   recipients,   methods  of
computation and amounts of compensation,  fees and distributions paid or payable
by the  Partnership  to the General  Partners and their  affiliates for the year
ended  December 31, 1998,  exclusive of any  distributions  to which the General
Partners or their  affiliates  may be entitled by reason of their  purchase  and
ownership of Units.
<TABLE>
<CAPTION>

                                                                                                Amount Incurred
       Type of Compensation                                                                       For the Year
            and Recipient                            Method of Computation                   Ended December 31, 1998
     -------------------------                       ---------------------                   -----------------------
<S> <C>
Reimbursement     to    affiliates    for     Operating  expenses  are  reimbursed     Operating   expenses   incurred   on
operating expenses                            at the  lower of cost or 90  percent     behalf    of    the     Partnership:
                                              of  the  prevailing  rate  at  which     $86,851
                                              comparable  services could have been
                                              obtained  in  the  same   geographic     Accounting    and     administrative
                                              area.   Affiliates  of  the  General     services: $87,256
                                              Partners  from  time to  time  incur
                                              certain   operating    expenses   on
                                              behalf of the  Partnership for which
                                              the   Partnership   reimburses   the
                                              affiliates without interest.

Annual,  subordinated  manage-ment fee to     One  percent  of the  sum  of  gross     $ - 0 -
affiliates                                    operating  revenues from  Properties
                                              wholly  owned  by the  Partnership
                                              plus the  Partnership's  allocable
                                              share of gross  revenues  of joint
                                              ventures in which the  Partnership
                                              is a co-venturer  and the Property
                                              owned   with   an   affiliate   as
                                              tenants-in-common, subordinated to
                                              certain  minimum  returns  to  the
                                              Limited  Partners.  The management
                                              fee  will not  exceed  competitive
                                              fees for comparable services.  Due
                                              to the fact  that  these  fees are
                                              non-cumulative,   if  the  Limited
                                              Partners  have not received  their
                                              10%   Preferred   Return   in  any
                                              particular   year,  no  management
                                              fees  will be due or  payable  for
                                              such year.

</TABLE>


<PAGE>


<TABLE>
<CAPTION>

                                                                                                  Amount Incurred
       Type of Compensation                                                                       For the Year
            and Recipient                            Method of Computation                   Ended December 31, 1998
     -------------------------                       ---------------------                   -----------------------
<S> <C>
Deferred,    subordinated   real   estate     A   deferred,    subordinated   real                   $ - 0 -
disposition fee payable to affiliates         estate   disposition   fee,  payable
                                              upon   sale   of   one   or   more
                                              Properties,  in an amount equal to
                                              the  lesser of (i)  one-half  of a
                                              competitive       real      estate
                                              commission,  or (ii) three percent
                                              of  the   sales   price   of  such
                                              Property or Properties. Payment of
                                              such  fee  shall  be made  only if
                                              affiliates of the General Partners
                                              provide  a  substantial  amount of
                                              services  in  connection  with the
                                              sale of a Property  or  Properties
                                              and  shall  be   subordinated   to
                                              certain  minimum  returns  to  the
                                              Limited Partners.  However, if the
                                              net sales  proceeds are reinvested
                                              in a replacement Property, no such
                                              real estate  disposition  fee will
                                              be incurred until such replacement
                                              Property is sold and the net sales
                                              proceeds are distributed.

General        Partners'        deferred,     A   deferred,   subordinated   share                   $ - 0 -
sub-ordinated  share of  Partnership  net     equal to one percent of  Partnership
cash flow                                     distributions   of  net  cash  flow,
                                              subordinated   to  certain   minimum
                                              returns to the Limited Partners.

General        Partners'        deferred,     A   deferred,   subordinated   share                   $ - 0 -
sub-ordinated  share of  Partnership  net     equal    to    five    percent    of
sales  proceeds  from a sale or sales not     Partnership  distributions  of  such
in liquidation of the Partnership             net sales proceeds,  subordinated to
                                              certain   minimum   returns  to  the
                                              Limited Partners.

</TABLE>


<PAGE>

<TABLE>
<CAPTION>

               
                                                                                             Amount Incurred
       Type of Compensation                                                                       For the Year
            and Recipient                            Method of Computation                   Ended December 31, 1998
     -------------------------                       ---------------------                   -----------------------
<S> <C>
General  Partners'  share of  Partnership     Distributions  of net sales proceeds                   $ - 0 -
net sales  proceeds  from a sale or sales     from   a   sale    or    sales    of
in liquidation of the Partnership             substantially     all     of     the
                                              Partnership's   assets   will   be
                                              distributed in the following order
                                              or priority: (i) first, to pay all
                                              debts  and   liabilities   of  the
                                              Partnership   and   to   establish
                                              reserves; (ii) second, to Partners
                                              with  positive   capital   account
                                              balances,   determined  after  the
                                              allocation  of  net  income,   net
                                              loss, gain and loss, in proportion
                                              to such  balances,  up to  amounts
                                              sufficient to reduce such balances
                                              to zero; and (iii) thereafter, 95%
                                              to the Limited  Partners and 5% to
                                              the General Partners.

</TABLE>

         As discussed  above in Item 8. Financial  Statements and  Supplementary
Data -- Note 11.  Subsequent Event, the Registrant has entered into an Agreement
and Plan of  Merger,  dated  March  11,  1999,  with APF  pursuant  to which the
Registrant would be merged with and into a subsidiary of APF in exchange for the
issuance of APF Shares.  The APF Shares are expected to be listed for trading on
the New York Stock Exchange concurrently with the consummation of the Merger. If
the Merger is approved by Limited Partners holding units greater than 50% of the
outstanding  units of the  Registrant,  the General  Partners of the  Registrant
would receive certain benefits, including:

         o        With respect to their ownership in the Registrant, the General
                  Partners  will be issued  approximately  31,848  shares of APF
                  common stock, par value $0.01 per share.

         o        Following  the  Merger,  James M.  Seneff,  Jr.  and Robert A.
                  Bourne,  the  individual  General  Partners,  will continue to
                  serve as directors of APF, with Mr. Seneff serving as Chairman
                  and Mr. Bourne  serving as Vice  Chairman.  As APF  directors,
                  they may also be entitled to receive  stock  options under any
                  stock option plan adopted by APF.



<PAGE>


                                     PART IV


Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)       The following documents are filed as part of this report.

          1.  Financial Statements

                  Report of Independent Accountants

                  Balance Sheets at December 31, 1998 and 1997

                  Statements  of Income for the years ended  December  31, 1998,
                  1997, and 1996

                  Statements of Partners'  Capital for the years ended  December
                  31, 1998, 1997, and 1996

                  Statements  of Cash  Flows for the years  ended  December  31,
                  1998, 1997, and 1996

                  Notes to Financial Statements

          2.  Financial Statement Schedules

                  Schedule II - Valuation and Qualifying  Accounts for the years
                  ended December 31, 1998, 1997, and 1996

                  Schedule  III - Real Estate and  Accumulated  Depreciation  at
                  December 31, 1998

                  Notes  to  Schedule   III  -  Real   Estate  and   Accumulated
                  Depreciation at December 31, 1998

                  Schedule IV - Mortgage  Loans on Real  Estate at December  31,
                  1998

                  All other Schedules are omitted as the required information is
                  inapplicable  or is presented in the  financial  statements or
                  notes thereto.

          3.  Exhibits

                  3.1      Affidavit and  Certificate of Limited  Partnership of
                           CNL Income Fund VII, Ltd. (Included as Exhibit 3.1 to
                           Registration  Statement No. 33-31482 on Form S-11 and
                           incorporated herein by reference.)

                  4.1      Affidavit and  Certificate of Limited  Partnership of
                           CNL Income Fund VII, Ltd. (Included as Exhibit 3.1 to
                           Registration  Statement No. 33-31482 on Form S-11 and
                           incorporated herein by reference.)

                  4.2      Amended and Restated Agreement of Limited Partnership
                           of CNL Income Fund VII, Ltd. (Included as Exhibit 4.2
                           to Form 10-K filed with the  Securities  and Exchange
                           Commission on April 1, 1996, and incorporated  herein
                           by reference.)

                  10.1     Management  Agreement  between  CNL Income  Fund VII,
                           Ltd. and CNL Investment  Company (Included as Exhibit
                           10.1 to Form  10-K  filed  with  the  Securities  and
                           Exchange   Commission   on   April   1,   1996,   and
                           incorporated herein by reference.)

                  10.2     Assignment   of   Management   Agreement   from   CNL
                           Investment Company to CNL Income Fund Advisors,  Inc.
                           (Included as Exhibit 10.2 to Form 10-K filed with the
                           Securities and Exchange Commission on March 30, 1995,
                           and incorporated herein by reference.)


<PAGE>


                  10.3     Assignment  of Management  Agreement  from CNL Income
                           Fund  Advisors,  Inc.  to  CNL  Fund  Advisors,  Inc.
                           (Included as Exhibit 10.3 to Form 10-K filed with the
                           Securities and Exchange  Commission on April 1, 1996,
                           and incorporated herein by reference.)

                  27       Financial Data Schedule (Filed herewith.)

          (b)     The Registrant  filed no reports on Form 8-K during the period
                  from October 1, 1998 through December 31, 1998.

          (c)     Not applicable.

          (d)     Other Financial Information

                  The   Partnership  is  required  to  file  audited   financial
                  information  of its tenant,  Golden Corral  Corporation,  as a
                  result of this  tenant  leasing  more than 20  percent  of the
                  Partnership's  total  assets for the year ended  December  31,
                  1998. Corral  Corporation is a privately-held  company and its
                  financial information is not publicly available.


<PAGE>






                                   SIGNATURES


         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the  undersigned,  thereunto duly  authorized,  on the 30th day of
March, 1999.

                                        CNL INCOME FUND VII, LTD.

                                        By:      CNL REALTY CORPORATION
                                                 General Partner

                                                 /s/ Robert A. Bourne    
                                                 --------------------------- 
                                                 ROBERT A. BOURNE, President


                                        By:      ROBERT A. BOURNE
                                                 General Partner

                                                 /s/ Robert A. Bourne
                                                 ---------------------------
                                                 ROBERT A. BOURNE

                                        By:      JAMES M. SENEFF, JR.
                                                 General Partner

                                                 /s/ James M. Seneff, Jr.
                                                 ---------------------------
                                                 JAMES M. SENEFF, JR.


<PAGE>


         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>

              Signature                                    Title                                   Date
<S> <C>
/s/ Robert A. Bourne                       President,   Treasurer  and  Director              March 30, 1999
-----------------------------
Robert A. Bourne                           Accounting  Officer)

/s/ James M. Seneff, Jr.                   Chief Executive  Officer and Director              March  30, 1999
-----------------------------              (Principal Executive  Officer)
James M. Seneff, Jr.

</TABLE>

<PAGE>







                            CNL INCOME FUND VII, LTD.
                         (A Florida Limited Partnership)

                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

                  Years Ended December 31, 1998, 1997, and 1996

<TABLE>
<CAPTION>

                                                               Additions                        Deductions
                                                     -------------------------------     --------------------------
                                                                                                       Collected
                                                                                                       or Deter-
                                   Balance at       Charged to       Charged to         Deemed         mined to        Balance
                                    Beginning        Costs and          Other          Uncollec-        be Col-        at End
   Year         Description          of Year         Expenses         Accounts           tible         lectible        of Year
  --------    -----------------   --------------   --------------   ---------------    -----------    ------------   -----------
<S> <C>
  1996        Allowance for
                  doubtful
                  accounts (a)         $470,298             $--           $11,187  (b)  $412,202  (c)     $15,263        $54,020
                                  ==============   ==============   ===============    ===========    ============   ===========

  1997        Allowance for
                  doubtful
                  accounts (a)          $54,020             $--            $5,000  (b)   $10,497  (c)      $5,719        $42,804
                                  ==============   ==============   ===============    ===========    ============   ===========

  1998        Allowance for
                  doubtful
                  accounts (a)          $42,804          $1,454             $ 159  (b)     $  --  (c)      $5,719        $38,698
                                  ==============   ==============   ===============    ===========    ============   ===========

</TABLE>

         (a) Deducted from  receivables and accrued rental income on the balance
               sheet.

         (b) Reduction of rental, earned and other income.

         (c) Amounts written off as uncollectible.


<PAGE>
<TABLE>
<CAPTION>


                                                             CNL INCOME FUND VII, LTD.
                                                          (A Florida Limited Partnership)

                                             SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION

                                                                December 31, 1998
<S> <C>

                                                                                        Costs Capitalized  
                                                                                           Subsequent To   
                                                               Initial Cost                 Acquisition    
                                                       --------------------------      ------------------- 
                                         Encum-                     Buildings and      Improve-   Carrying 
                                         brances           Land     Improvements         ments     Costs   
                                      ------------       ---------  -------------      ---------  -------- 
Properties the Partnership
  has Invested in Under
  Operating Leases:

    Boston Market Restaurant:
      Marietta, Georgia                   -              $534,421      $507,133              -        -    

    Burger King Restaurants:
      Jefferson City, Tennessee           -               216,633       546,967              -        -    
      Maryville, Tennessee                -               419,766       545,880              -        -    
      Sierra Vista, Arizona               -               421,170             -              -        -    

    Checkers Drive-In Restaurant:
      Winter Springs, Florida             -               397,536             -              -        -    

    Church's Fried Chicken
     Restaurants:
      Gainesville, Florida (h)            -               79,395       124,653              -        -     
      Daytona Beach, Florida              -               149,701             -              -        -    

    Golden Corral Family
     Steakhouse Restaurants:
      Odessa, Texas                       -               502,364       815,831              -        -    
      Midland, Texas                      -               481,748       857,185              -        -    
      El Paso, Texas                      -               745,506             -        802,132        -    
      Harlingen, Texas                    -               503,799             -        890,878        -    

    Hardee's Restaurants:
      Akron, Ohio                         -               198,086             -              -        -    
      Dalton, Ohio                        -               180,556             -              -        -    
      Minerva, Ohio                       -               143,775             -              -        -    
      Orrville, Ohio                      -               176,169             -              -        -    
      Seville, Ohio                       -               245,648             -              -        -    
      Clinton, Tennessee                  -               295,861             -              -        -    

    Jack in the Box Restaurant:
      San Antonio, Texas                  -               525,720             -        381,591        -    

    KFC Restaurants:
      Friendswood, Texas                  -               161,906             -              -        -    
      Arcadia, Florida                    -               175,020       333,759              -        -    

    Popeyes Famous Fried
     Chicken Restaurants:
      Jacksonville, Florida               -               128,398       139,768        136,262        -    
      Lake City, Florida                  -               130,300       254,747        139,099        -    
      Jacksonville, Florida               -               142,490       137,396        134,259        -    
      Brunswick, Georgia                  -               104,720       251,955        150,888        -    

    Rally's Restaurant:
      Toledo, Ohio                        -               281,880       196,608         47,002        -    

    Shoney's Restaurants:
      Pueblo, Colorado                    -               492,230       559,769              -        -    
      Saddlebrook, Florida                -               427,238             -        765,532        -    

    Taco Bell Restaurant:
      Detroit, Michigan                   -               168,429             -        402,674        -    
                                                     ------------  ------------  -------------  ------- 

                                                       $8,430,465    $5,271,651     $3,850,317        -    
                                                     ============  ============  =============  ======= 

Property of Joint Venture in
  Which the Partnership has
  a 51.10% Interest and has
  Invested in Under an
  Operating Lease:

    Burger King Restaurant:
      Knoxville, Tennessee                -              $283,961      $430,406              -        -    
                                                     ============  ============  =============  ======= 

Properties of Joint Venture in
  Which the Partnership has
  an 18% Interest and has
  Invested in Under Operating
  Leases:

    Burger King Restaurants:
      Columbus, Ohio                      -              $345,696      $651,985              -        -    
      San Antonio, Texas                  -               350,479       623,615              -        -    
      Pontiac, Michigan                   -               277,192       982,200              -        -    
      Raceland, Louisiana                 -               174,019       986,879              -        -    
      New Castle, Indiana                 -               264,239       662,265              -        -    
      Hastings, Minnesota                 -               155,553       657,159              -        -    
                                                     ------------  ------------  -------------  ------- 

                                                       $1,567,178    $4,564,103              -        -    
                                                     ============  ============  =============  ======= 
Property of Joint Venture in Which
  the Partnership has a 4.79% Interest
  and has Invested in Under an Operating
  Lease:

    Jack in the Box Restaurant:
      Des Moines, Washington              -              $322,726      $791,658              -        -    
                                                     ============  ============  =============  ======= 

Property of Joint Venture in Which the
  Partnership has a 79% Interest and has
  Invested in Under an Operating Lease:

    Jack in the Box Restaurant:
      Mansfield, Texas                    -              $297,295      $482,914              -        -    
                                                     ============  ============  =============  ======= 

Property in Which the Partnership has a
  53% Interest as Tenants-in-Common and
  has Invested in Under an Operating Lease:

    Golden Corral Restaurant:
      Smithfield, North Carolina          -              $264,272    $1,155,018              -        -    
                                                     ============  ============  =============  ======= 

Property in Which the Partnership has a
  35.64% Interest as Tenants-in-Common
  and has Invested in Under an Operating
  Lease:

    Chevy's Fresh Mex Restaurant:
      Miami, Florida                      -              $976,357      $974,016              -        -    
                                                     ============  ============  =============  ======= 

Properties the Partnership has
  Invested in Under Direct
  Financing Leases:

    Burger King Restaurant:
      Sierra Vista, Arizona               -                     -             -       $333,212        -    

    Hardee's Restaurants:
      Akron, Ohio                         -                     -       540,215              -        -    
      Dalton, Ohio                        -                     -       490,656              -        -    
      Minerva, Ohio                       -                     -       436,663              -        -    
      Orrville, Ohio                      -                     -       446,337              -        -    
      Seville, Ohio                       -                     -       487,630              -        -    
      Clinton Tennessee                   -                     -       338,216              -        -    

    KFC Restaurants:
      Friendswood, Texas                  -                     -             -        359,055        -    

    Popeyes Famous Fried
     Chicken Restaurant:
      Jacksonville, Florida               -                78,842       146,035        142,348        -    
                                                     ------------  ------------  -------------  -------

                                                          $78,842    $2,885,752       $834,615        -
                                                     ============  ============  =============  =======



                                                                                            
           Gross Amount at Which                                            Life on Which  
          Carried at Close of Period (c)                                    Depreciation in
 -----------------------------------------              Date                 Latest Income 
              Buildings and              Accumulated   of Con-     Date       Statement is 
    Land      Improvements     Total     Depreciation struction  Acquired       Computed   
 -----------  ------------- -----------  ------------ --------   --------    --------------
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
  $534,421       $507,133    $1,041,554      $36,673    1994       10/96           (b)         
                                                                                            
                                                                                            
   216,633        546,967       763,600      156,597    1988       01/90           (b)         
   419,766        545,880       965,646      157,632    1986       01/90           (b)         
   421,170             (f)      421,170            -    1990       06/90           (d)         
                                                                                            
                                                                                            
   397,536              -       397,536           (g)    -         07/94           (g)         
                                                                                            
                                                                                            
                                                                                            
   79,395        124,653       204,048       33,070    1983        01/91           (b)          
   149,701              -       149,701            -    1985       01/91           (i)         
                                                                                            
                                                                                            
                                                                                            
   502,364        815,831     1,318,195      238,193    1990       03/90           (b)         
   481,748        857,185     1,338,933      249,719    1990       04/90           (b)         
   745,506        802,132     1,547,638      221,520    1990       05/90           (b)         
   503,799        890,878     1,394,677      248,470    1990       06/90           (b)         
                                                                                            
                                                                                            
   198,086             (f)      198,086            -    1990       11/90           (d)         
   180,556             (f)      180,556            -    1990       11/90           (d)         
   143,775             (f)      143,775            -    1990       11/90           (d)         
   176,169             (f)      176,169            -    1990       11/90           (d)         
   245,648             (f)      245,648            -    1990       11/90           (d)         
   295,861             (f)      295,861            -    1992       09/92           (d)         
                                                                                            
                                                                                            
   525,720        381,591       907,311      107,229    1990       05/90           (b)         
                                                                                            
                                                                                            
   161,906             (f)      161,906            -    1990       06/90           (d)         
   175,020        333,759       508,779       93,514    1985       08/90           (b)         
                                                                                            
                                                                                            
                                                                                            
   128,398        276,030       404,428       78,153    1985       04/90           (b)         
   130,300        393,846       524,146      111,913    1985       04/90           (b)         
   142,490        271,655       414,145       77,116    1985       04/90           (b)         
   104,720        402,843       507,563      112,072    1974       04/90           (b)         
                                                                                            
                                                                                            
   281,880        243,610       525,490       64,896    1990       01/91           (b)         
                                                                                            
                                                                                            
   492,230        559,769     1,051,999      156,275    1989       08/90           (b)         
   427,238        765,532     1,192,770      218,614    1990       04/90           (b)         
                                                                                            
                                                                                            
   168,429        402,674       571,103      112,270    1990       06/90           (b)         
----------  -------------  ------------  -----------                                        
                                                                                            
$8,430,465     $9,121,968   $17,552,433   $2,473,926                                        
==========  =============  ============  ===========                                        
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
  $283,961       $430,406      $714,367     $127,688    1985       01/90           (b)         
==========  =============  ============  ===========                                        
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
  $345,696       $651,985      $997,681     $157,846    1986       09/91           (b)         
   350,479        623,615       974,094      150,977    1986       09/91           (b)         
   277,192        982,200     1,259,392      237,791    1987       09/91           (b)         
   174,019        986,879     1,160,898      238,924    1988       09/91           (b)         
   264,239        662,265       926,504      160,335    1988       09/91           (b)         
   155,553        657,159       812,712      159,099    1990       09/91           (b)         
----------  -------------  ------------  -----------                                        
                                                                                            
$1,567,178     $4,564,103    $6,131,281   $1,104,972                                        
==========  =============  ============  ===========                                        
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
  $322,726       $791,658    $1,114,384     $163,895    1992       10/92           (b)         
==========  =============  ============  ===========                                        
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
  $297,295       $482,914      $780,209      $28,964    1997       02/97           (b)         
==========  =============  ============  ===========                                        
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
  $264,272     $1,155,018    $1,419,290      $39,450    1996       12/97           (b)         
==========  =============  ============  ===========                                        
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
  $976,357       $974,016    $1,950,373      $32,556    1995       12/97           (b)         
==========  =============  ============  ===========                                        
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
                                                                                            
         -             (f)           (f)          (d)   1990       06/90           (d)         
                                                                                            
                                                                                            
         -             (f)           (f)          (d)   1990       11/90           (d)         
         -             (f)           (f)          (d)   1990       11/90           (d)         
         -             (f)           (f)          (d)   1990       11/90           (d)         
         -             (f)           (f)          (d)   1990       11/90           (d)         
         -             (f)           (f)          (d)   1990       11/90           (d)         
         -             (f)           (f)          (d)   1992       09/92           (d)         
                                                                                            
                                                                                            
         -             (f)           (f)          (d)   1990       06/90           (d)         
                                                                                            
                                                                                            
                                                                                            
        (f)            (f)           (f)          (e)   1985       04/90           (e)         
                                                                                            
                                                                                            
</TABLE>

<PAGE>




                            CNL INCOME FUND VII, LTD.
                         (A Florida Limited Partnership)

        NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION

                                December 31, 1998



(a)      Transactions in real estate and accumulated  depreciation  during 1998,
         1997 and 1996, are summarized as follows:
<TABLE>
<CAPTION>

                                                                                                  Accumulated
                                                                                  Cost            Depreciation
                                                                            ------------------  -----------------
<S> <C>
              Properties the Partnership has Invested
                in Under Operating Leases:

                   Balance, December 31, 1995                                    $  18,088,038     $   1,686,119
                   Acquisitions                                                      1,041,554                --
                   Dispositions                                                     (1,333,831)         (138,862 )
                   Depreciation expense                                                     --           317,957
                                                                            ------------------  -----------------

                   Balance, December 31, 1996                                       17,795,761         1,865,214
                   Dispositions                                                       (243,328)               --
                   Depreciation expense                                                     --           304,356
                                                                            ------------------  -----------------

                   Balance, December 31, 1997                                       17,552,433         2,169,570
                   Depreciation expense                                                     --           304,356
                                                                            ------------------  -----------------

                   Balance, December 31, 1998                                    $  17,552,433     $   2,473,926
                                                                            ==================  =================

              Property of Joint  Venture in Which
                the  Partnership  has a 51.10%
                Interest and has Invested in
                Under an Operating Lease:

                   Balance, December 31, 1995                                     $    714,367      $     84,647
                   Depreciation expense                                                     --            14,347
                                                                            ------------------  -----------------

                   Balance, December 31, 1996                                          714,367            98,994
                   Depreciation expense                                                     --            14,347
                                                                            ------------------  -----------------

                   Balance, December 31, 1997                                          714,367           113,341
                   Depreciation expense                                                     --            14,347
                                                                            ------------------  -----------------

                   Balance, December 31, 1998                                     $    714,367      $    127,688
                                                                            ==================  =================

</TABLE>


<PAGE>


                            CNL INCOME FUND VII, LTD.
                         (A Florida Limited Partnership)

  NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED

                                December 31, 1998
<TABLE>
<CAPTION>

                                                                                                     Accumulated
                                                                                  Cost              Depreciation
                                                                            -----------------     -----------------
<S> <C>
             Properties  of Joint  Venture in
                Which the  Partnership  has an 18%
                Interest and has Invested in
                Under Operating Leases:

                  Balance, December 31, 1995                                    $  6,131,281            $   648,561
                  Depreciation expense                                                    --                152,137
                                                                            -----------------     -----------------

                  Balance, December 31, 1996                                       6,131,281                800,698
                  Depreciation expense                                                    --                152,137
                                                                            -----------------     -----------------

                  Balance, December 31, 1997                                       6,131,281                952,835
                  Depreciation expense                                                    --                152,137
                                                                            -----------------     -----------------

                  Balance, December 31, 1998                                    $  6,131,281           $  1,104,972
                                                                            =================     =================

             Property of Joint  Venture  in Which
                the  Partnership  has a 4.79%
                Interest and has Invested in
                Under an Operating Lease:

                     Balance, December 31, 1995                                 $  1,114,384            $    84,729
                     Depreciation expense                                                 --                 26,389
                                                                            -----------------     -----------------

                     Balance, December 31, 1996                                    1,114,384                111,118
                     Depreciation expense                                                 --                 26,389
                                                                            -----------------     -----------------

                     Balance, December 31, 1997                                    1,114,384                137,507
                     Depreciation expense                                                 --                 26,388
                                                                            -----------------     -----------------

                     Balance, December 31, 1998                                 $  1,114,384            $   163,895
                                                                            =================     =================


</TABLE>


<PAGE>


                            CNL INCOME FUND VII, LTD.
                         (A Florida Limited Partnership)

  NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED

<TABLE>
<CAPTION>
                                December 31, 1998

                                                                                                      Accumulated
                                                                                  Cost               Depreciation
                                                                            ------------------     ------------------
<S> <C>
              Property  in  Which  the  Partnership
                 has a  48.33%  Interest  as
                 Tenants-in-Common and has Invested
                 in Under an Operating Lease:

                   Balance, December 31, 1995                                    $    881,033           $     30,580
                   Depreciation expense                                                    --                 20,860
                                                                            ------------------     ------------------

                   Balance, December 31, 1996                                         881,033                 51,440
                   Depreciation expense                                                    --                 17,383
                   Dispositions                                                      (881,033 )              (68,823 )
                                                                            ------------------     ------------------

                   Balance, December 31, 1997                                               --                      --
                   Depreciation expense                                                     --                      --
                                                                            ------------------     ------------------

                   Balance, December 31, 1998                                       $      --              $      --
                                                                            ==================     ==================

              Property of Joint Venture in Which the
                 Partnership has a 79% Interest and has
                 Invested in Under an Operating
                 Lease:

                   Balance, December 31, 1996                                       $      --              $      --
                   Acquisitions                                                       780,209                     --
                   Depreciation expense                                                    --                 12,778
                                                                            ------------------     ------------------

                   Balance, December 31, 1997                                         780,209                 12,778
                   Depreciation expense                                                    --                 16,186
                                                                            ------------------     ------------------

                   Balance, December 31, 1998                                    $    780,209           $     28,964
                                                                            ==================     ==================



</TABLE>

<PAGE>


                            CNL INCOME FUND VII, LTD.
                         (A Florida Limited Partnership)

  NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED

                                December 31, 1998

<TABLE>
<CAPTION>

                                                                                                    Accumulated
                                                                                  Cost              Depreciation
                                                                            -----------------     -----------------
<S> <C>
             Property  of  Joint  Venture  in
                Which  the  Partnership  has a 53%
                Interest  as  Tenants-in-Common
                and has  Invested  in  Under an
                Operating Lease:

                  Balance, December 31, 1996                                        $     --              $     --
                  Acquisitions                                                     1,419,290                    --
                  Depreciation expense                                                    --                   949
                                                                            -----------------     -----------------

                  Balance, December 31, 1997                                       1,419,290                   949
                  Depreciation expense                                                    --                38,501
                                                                            -----------------     -----------------

                  Balance, December 31, 1998                                    $  1,419,290           $    39,450
                                                                            =================     =================


             Property  in  Which  the  Partnership
                 has  a  35.64%  Interest  as
                 Tenants-in-Common and has Invested
                 in Under an Operating Lease:

                  Balance, December 31, 1996                                        $     --              $     --
                  Acquisitions                                                     1,950,373                    --
                  Depreciation expense                                                    --                    89
                                                                            -----------------     -----------------

                  Balance December 31, 1997                                        1,950,373                    89
                  Depreciation                                                            --                32,467
                                                                            -----------------     -----------------

                  Balance December 31, 1998                                     $  1,950,373           $    32,556
                                                                            =================     =================
</TABLE>


  (b)        Depreciation  expense is computed for  buildings  and  improvements
             based upon estimated lives of 30 years.

  (c)        As of December 31, 1998, the aggregate cost of the Properties owned
             by the  Partnership  and its  consolidated  joint venture,  and the
             unconsolidated  joint ventures  (including  the Properties  held as
             tenants-in-common)  for federal income tax purposes was $21,303,689
             and  $12,109,904,  respectively.  All of the leases are  treated as
             operating leases for federal income tax purposes.

  (d)        For financial reporting purposes, the portion of the lease relating
             to the building has been recorded as a direct  financing lease. The
             cost of the building  has been  included in the net  investment  in
             direct financing leases; therefore, depreciation is not applicable.


<PAGE>


                            CNL INCOME FUND VII, LTD.
                         (A Florida Limited Partnership)

  NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED

                                December 31, 1998



  (e)        For  financial  reporting  purposes,  the  lease  for the  land and
             building has been recorded as a direct financing lease. The cost of
             the land and building has been included in net investment in direct
             financing leases; therefore, depreciation is not applicable.

  (f)        For financial reporting  purposes,  certain components of the lease
             relating  to land  and  building  have  been  recorded  as a direct
             financing lease. Accordingly, costs relating to these components of
             this lease are not shown.

  (g)        The  building  portion  of this  Property  is owned by the  tenant;
             therefore, depreciation is not applicable.

  (h)        The tenant of this Property,  Restaurant Management Services, Inc.,
             has  subleased  this Property to a local,  independent  restaurant.
             Restaurant  Management  Services,  Inc. continues to be responsible
             for  complying  with all the  terms of the lease  agreement  and is
             continuing  to pay rent on this  Property,  subject to certain rent
             concessions, to the Partnership.

  (i)        The  building  located on this  Property  was  demolished  in 1995;
             therefore, depreciation is not applicable.





<PAGE>


                            CNL INCOME FUND VII, LTD.
                         (A Florida Limited Partnership)

                   SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE

                                December 31, 1998
<TABLE>
<CAPTION>



                                                                                                                        Principal
                                                                                                                        Amount of
                                                                                                                          Loans
                                                                                                                       Subject to
                                         Final          Periodic                      Face           Carrying          Delinquent
                        Interest       Maturity         Payment        Prior        Amount of        Amount of          Principal
     Description          Rate           Date            Terms         Liens        Mortgages      Mortgages (3)       or Interest
   -----------------    ---------   ----------------   -----------    ---------    -------------   --------------     -------------
<S> <C>
   Perkins -
   Florence, SC
   First Mortgage        10.25%        July 2000          (1)             $--       $1,160,000        $1,003,529                $--

   Church's -
   Jacksonville, FL
   First Mortgage        10.00%      December 2005        (2)              --          240,000           237,527                 --
                                                                      ---------    -------------   --------------     -------------

       Total                                                              $--       $1,400,000        $1,241,056 (4)            $--
                                                                      =========    =============   ==============     =============

</TABLE>

 (1)  Monthly  payments of  principal  and interest at an annual rate of 10.25%,
      with a balloon payment at maturity of $1,105,715.

 (2)  Monthly  payments of  principal  and interest at an annual rate of 10.00%,
      with a balloon payment at maturity of $218,252.

 (3)  The tax carrying value of the notes is approximately $1,262,723,  which is
      net of deferred gain of $95,154.

 (4)  The changes in the carrying amounts are summarized as follows:
<TABLE>
<CAPTION>

                                                         1998                1997               1996
                                                     ---------------    ---------------    ----------------
<S> <C>
      Balance at beginning of period                    $1,250,597          $1,259,495          $1,267,849

      Interest earned                                      139,446             140,188             140,822

      Collection of principal and interest                (150,012  )         (150,012 )          (150,012 )

      Recognition of deferred gain on sale of
          land and building                                  1,025                 926                 836
                                                     ---------------    ---------------    ----------------

      Balance at end of period                          $1,241,056          $1,250,597          $1,259,495
                                                     ===============    =============== ===================

</TABLE>


<PAGE>






                                    EXHIBITS


<PAGE>







                                  EXHIBIT INDEX


Exhibit Number

      3.1         Affidavit and Certificate of Limited Partnership of CNL Income
                  Fund  VII,  Ltd.  (Included  as  Exhibit  3.1 to  Registration
                  Statement No. 33-31482 on Form S-11 and incorporated herein by
                  reference.)

      4.1         Affidavit and Certificate of Limited Partnership of CNL Income
                  Fund  VII,  Ltd.  (Included  as  Exhibit  3.1 to  Registration
                  Statement No. 33-31482 on Form S-11 and incorporated herein by
                  reference.)

      4.2         Amended and Restated  Agreement of Limited  Partnership of CNL
                  Income Fund VII,  Ltd.  (Included  as Exhibit 4.2 to Form 10-K
                  filed with the Securities and Exchange  Commission on April 1,
                  1996, and incorporated herein by reference.)

     10.1         Management Agreement between CNL Income Fund VII, Ltd. and CNL
                  Investment  Company  (Included  as  Exhibit  10.1 to Form 10-K
                  filed with the Securities and Exchange  Commission on April 1,
                  1996, and incorporated herein by reference.)

     10.2         Assignment of Management Agreement from CNL Investment Company
                  to CNL Income Fund Advisors, Inc. (Included as Exhibit 10.2 to
                  Form 10-K filed with the Securities and Exchange Commission on
                  March 30, 1995, and incorporated herein by reference.)

     10.3         Assignment  of  Management  Agreement  from  CNL  Income  Fund
                  Advisors, Inc. to CNL Fund Advisors, Inc. (Included as Exhibit
                  10.3 to Form  10-K  filed  with the  Securities  and  Exchange
                  Commission  on April  1,  1996,  and  incorporated  herein  by
                  reference.)

        27        Financial Data Schedule (Filed herewith.)